The approach at Scripbox has always been to construct a portfolio and not recommend a single vehicle (Fund, Stock, etc.). This approach has been implemented in the backdrop of data-driven decision-making and scientific temperament.
Here’s how we believe a portfolio should be constructed
The idea is to estimate how much risk you can tolerate and then use portfolio theory to construct a portfolio. Equities can be as risky as you like, fixed income assets should mainly consist of securities that won’t take a haircut during a severe crisis.
The aggressiveness of your portfolio should be reflected in the equity-debt mix and not in the kind of equities you hold – which should be similar at all levels of risk.
Asset Class Evaluation and Responsible Asset Allocation will strive to ensure that at a portfolio level, returns are higher than inflation.
What is the purpose of risk profiling?
Risk Profiling is the activity of taking stock of an investor’s risk appetite and risk tolerance. This is done with the aim of designing a portfolio that matches the investors’ nature. The importance of the risk profile is twofold:
- It gives the investment advisor an insight into what is right for each customer
- Gives the investor a better understanding of his / her own temperament and thereby guides his or her decision making which in turn leads to better investment outcomes
The exercise of risk profiling should ideally be done at a regular frequency (once a year) such that it reflects changes in circumstances and expectations and can facilitate making any necessary tweaks.
What are the outcomes of the Scripbox Risk Profiles
The outcomes of the risk profile will be that for long-term wealth creation, each investor will be tagged to a certain profile. The profiles and what they are representative of are as below:
- Active Growth: Try to achieve high (4-6%) growth above inflation with the possibility of a temporary 30-40% loss in portfolio
- Balanced Growth: Try to achieve moderate (2-3%) growth above inflation with the possibility of a temporary 15-20% loss in portfolio
- Safe Growth: Preserve principal with post-tax growth at par with inflation
- Minimum Risk: Preserve principal even if post-tax growth is below inflation
Different asset allocations based on the investor’s portfolio size
We recommend an asset allocation based on the investor’s AUM in order to reduce the clutter at the beginning of the investment journey. To start the investment process, we begin with the basic asset classes, which are equity (Indian equity) and debt (fixed income).
As the AUM size increases, we add other asset classes like precious metals. This is done to ensure that investors get manageable portfolios while optimising for risk and return.
What is the ideal number of funds that one must have in the portfolio?
Quality is more important than quantity. Small allocations would not add any value to the overall portfolio. If a fund outperforms but has a meagre allocation, the portfolio would not benefit from it. Ideally, 6 to 8 funds are adequate to build your MF portfolio. As the size of the portfolio increases, you may invest in a maximum of 10 funds to reduce risk.