Guide To Portfolio Investment: How It Works & Types | MetLife Bangladesh

What is portfolio investment?

Portfolio investment refers to the purchase of securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other financial instruments by investors to earn a return on their investment. The portfolio refers to the collection of different investments made by an individual or an organization

Definition of portfolio investment

The investment is usually made by an individual or institution with surplus funds to invest, looking to the diversification of the portfolio and spread the risk across different assets.

The purpose of portfolio investment is to create a diverse range of investments that will provide investors with the opportunity to earn a return with risk management. By investing in different types of securities, investors can reduce the impact of any one investment performing poorly.

How portfolio investment works

To begin portfolio investment, an investor typically starts by defining their investment objectives, risk tolerance, and time horizon. Based on these factors, they can then develop an investment plan that outlines the allocation of their funds across various assets and asset classes.

Portfolio management process

Portfolio management enables investors to make substantial profits while shielding their investments from market risks. Avoid losses, it typically requires establishing financial objectives, selecting the appropriate investments, allocating assets, assessing risks, and diversifying resources. By matching their income and financial goals with their risk tolerance, investors can achieve considerable financial gains. As an investor, you can develop a strategy to invest in assets such as stocks, bonds, mutual funds, private equity, digital currencies, (Exchange Traded Funds), real estate, and insurance.

Investment analysis in portfolio management

Investment analysis and portfolio management aim to determine how an investment is likely to perform and how suitable it is for a particular investor. Key factors in investment analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole.

Creating a diversified portfolio

Under various market conditions, a well-balanced mix of various investment assets—stocks, bonds, and cash keeps your portfolio growing.

Investing in index funds and Exchange Traded Funds (passive investments that seek to replicate the performance of a particular market index) is one of the simplest strategies to achieve portfolio diversification. You gain exposure to hundreds or thousands of various stocks and bonds when you own low-cost funds in your portfolio.

Types of portfolio investment

Check out the article below to find out a different type of investing. Based on the risk involved and the investors' financial objectives, these stock portfolios are different from one another. An ideal investment portfolio is well-balanced in all respects and provides the investor with sufficient returns to achieve his financial objectives.

Equity portfolio

An equity portfolio is a collection of stocks and/or other equity securities owned by an investor. The goal of an equity portfolio is typically to achieve capital appreciation through investments in publicly traded companies that are expected to grow in value over time. To construct an equity portfolio, an investor will typically consider several factors, including their investment objectives, risk tolerance, time horizon, and current market conditions.

Fixed income portfolio

A fixed-income portfolio typically consists of a collection of fixed-income securities, such as bonds, that provide a fixed stream of income to the investor. The goal of a fixed-income portfolio is typically to generate income and preserve capital, rather than achieve significant capital appreciation.

To construct a fixed-income portfolio, an investor will typically consider several factors, including investment objectives, risk tolerance, time horizon, and current market conditions.

Balanced portfolio

This is one of the portfolio investments with a moderate level of risk. Investors in this area are in the game with a long-term horizon and a respectable appetite for risk. A balanced portfolio typically consists of 55-60% equity shares and 25-35% debt securities, such as bonds, commercial papers, and government securities. Gold or cash and cash equivalents make up the balance.

Foreign portfolio investment

Foreign portfolio investment in Bangladesh refers to the investment made by individuals or institutions in the securities (such as stocks, bonds, and other financial assets) of a country other than its own. This type of investment typically involves buying and selling securities in financial markets, and it can be done either by direct ownership or through intermediaries such as mutual funds, exchange-traded funds (ETFs), or hedge funds.

Benefits of portfolio investment

The advantages of owning different types of investment portfolios can be extensive and could last for many generations. A person can use sensible investing to protect their initial investment and increase it to levels that they otherwise would not have been able to. Find out the savings & investment plans at “MetLife" to secure your income.

Diversification of investments

Portfolio investment allows investors to the diversification of their investments across different types of assets and geographical regions, which can help to reduce overall investment risk. By spreading investments across various assets, investors can minimize the impact of any one asset's performance on their overall investment returns. Insurance can be also considered as a type of investment, primary purpose of insurance is to provide protection against financial losses that may occur due to unforeseen events.

Reducing risk through spreading investments

Portfolio investment enables investors to gain exposure to different markets and economies around the world, allowing them to benefit from economic growth and risk management.

Creating a balanced portfolio

Creating a balanced portfolio involves selecting a mix of investments that align with an investor's goals, risk tolerance, and investment time horizon. A balanced portfolio typically includes a combination of stocks, bonds, and other assets that have different levels of risk and return potential.

Potential for higher returns

Many portfolio investments are managed by professional fund managers, who have the expertise and resources to make informed investment decisions on behalf of their clients. This can help investors to achieve higher returns than they might be able to achieve on their own.

Customization and control

Investors can select individual investments or choose from a range of professionally managed funds that align with their investment goals and values. By selecting individual investments, investors have greater control over their portfolios and can choose investments that match their specific criteria.

Risks of portfolio investment

You build an investment portfolio when you invest in a variety of assets. Like with any investment, you could achieve your financial objectives and earn respectable returns, or you could lose money. Portfolio risk refers to the possibility or risks that your portfolio won't help you achieve all of your financial objectives. Although there are risk management strategies to protect your portfolio from these risks, the truth is that they can only be minimized.

Market risk

The greatest of all risks any portfolio could face is market risk, also known as systematic risk. As the name suggests, this risk exists due to the volatility of the market. Furthermore, types of market risk include equity risk, interest rate risk, and currency risk.

The risk of losses due to overall market performance

The risk of losses due to overall market performance is a significant concern in portfolio investment. This risk, often referred to as systemic risk, is the risk that affects the entire market or a significant portion of it and can lead to a decline in the value of a portfolio.

Volatility risk

Volatility risk refers to the potential for fluctuations in the value of an asset or portfolio of assets. In portfolio investment, volatility risk is a significant concern because it can affect an investor's returns and their ability to achieve their investment objectives.

Concentration risk

Concentration risk is the possibility of losing money when you choose to invest all of your funds in just one type of asset, such as the stock market. A sound investment portfolio spreads its money across a variety of assets.

The risk of over-investing in a single asset or sector

Over-investing in a single asset or sector in portfolio investment can expose investors to significant risks. Such a concentrated investment strategy can result in significant losses if the asset or sector experiences a decline in value.

Direct vs. Portfolio investment

Direct investment involves control of the assets while portfolio investment involves purchases of securities or minority ownership of shares. Only investment institutions, such as pension funds keep portfolio investments, whereas households or businesses only have direct investments.

Definition and differences between direct and portfolio investment

In direct investment, the investor has direct involvement with the investment.

Portfolio investment can refer to investing in securities by the pension fund, mutual fund, or other institutional investment. Check out points that distinguish between direct investment and portfolio investment.

Risks Involved

Direct stock investments have greater risks involved than investments in a portfolio. Based on research, portfolio investment diversifies the risk by making investments in several sectors.

Return Optimization

Direct investments may produce returns that are either too low or too high. Still, these portfolio investments produce optimal returns as they have investments in well-diversified sectors. 

Cost of Investment

Direct stock investments will have a low cost, as you are investing on your own. The portfolio investment, however, will have some cost involved because you'll have to pay the market experts' fees to create and rebalance your portfolio.

Control Over Your Investments

With direct investment, you have complete control over your money and can choose your assets. In contrast, all portfolio investment decisions are made by industry professionals.

How to create an investment portfolio

Creating an investment portfolio involves several steps. Here are some general guidelines to help how to create an investment portfolio:

Determining investment goals

Before you begin investing, you should have a clear understanding of your investment goals, such as saving for retirement, buying a home, or funding your children's education. You should also consider your risk tolerance, which is your ability and willingness to accept investment risk. Your investment goals and risk tolerance will help guide your investment decisions. Insurance can be used as an investment tool to help achieve long-term financial goals. It can be used to supplement retirement income, education fund expenses.

Asset allocation strategies

Investors can customize their portfolio investments by choosing the asset classes and specific investments that align with their investment strategy, risk management, and time horizon. For example, an investor seeking high returns may allocate a higher percentage of their portfolio to stocks, while an investor seeking more stability may allocate more to bonds.

Evaluating investment options

Once you have determined your asset allocation, you can begin selecting individual investments that fit within each asset class. You can choose individual stocks, bonds, mutual funds, exchange-traded funds (ETFs) or insurance. Insurance products are a great investment option as it involves less risk and can support on uncertain event and also be added as a savings or investment component for the family.

Monitoring and rebalancing the portfolio

Once you have created your investment portfolio, you should monitor it regularly to ensure that it continues to meet your investment goals and risk tolerance. You may need to adjust your portfolio over time as your investment strategy change.

Conclusion

Portfolio investment can provide individuals and institutions with opportunities to earn returns and diversification of their assets. By investing in a variety of assets, investors can reduce their exposure to risk and volatility in any one asset class. However, it is important to carefully consider one's investment objectives, investment analysis, portfolio management risk tolerance, and time horizon before making an investment strategy.