How to create a portfolio in the share market

Investing in share market allows you to invest in stocks across various companies and sectors. This diversification helps spread risks associated with putting all your money in just one or two assets. With an optimal strategy, a share portfolio can provide inflation-beating returns with the potential to outperform fixed deposits over the long run. However, stock investments also carry higher risks and require continuous monitoring. Below is a step-by-step guide to building your first share market portfolio as a beginner.

• Table of contents

• What is a share market portfolio?
• How to start building your portfolio
• Things to keep in mind
• Common mistakes to avoid as a new investor
• Guidance for portfolio management

What is a share market portfolio?

A share market portfolio refers to a collection of stocks across different companies. The goal is to invest in quality stocks trading at reasonable valuations. A portfolio lowers risk through diversification. It combines stocks across market caps, sectors and industries to balance returns and risks.

How to start building your portfolio

Step 1- Decide investment goals

First, determine your investment objectives. Are you investing for short-term trading gains or long-term wealth creation? Your goal will influence the type of stocks you buy. Define your expected returns and acceptable risk levels.

Long-term investors may focus on quality stocks with steady growth rather than speculative stocks. Set realistic return expectations for long-term holdings.

Step 2- Allocate overall investment

Decide the overall capital you want to allocate to equity shares as part of your portfolio. Experts suggest allocating about 40-60% of the investable surplus to stock markets for moderate risk investors. The remaining portion can go to fixed deposits, debt funds, gold etc.

Younger investors can allocate higher capital of about 75% to shares for relatively better returns. Elderly investors closer to retirement are recommended to limit share allocation to 30-40%.

Step 3- Choose the right stocks

Carefully select fundamentally strong stocks from different market caps and sectors. Analyse financial ratios like P/E, current ratio, debt-equity ratio etc. to shortlist stocks trading at reasonable valuations.

Prefer companies with long track records, strong brand value, able management and high corporate governance standards. Invest in a mix of large, mid and small-cap stocks to balance stability and growth.

Step 4- Build a diversified portfolio

Construct a diversified portfolio with about 15-20 stocks from different sectors like technology, banking, auto, pharma etc. Diversification reduces overall risk.

Step 5- Decide investment approach

Figure out your investment style - whether you want to be a long-term buy and hold investor or a short-term trader. Long-term investors can use a combination of top-down and bottom-up approach.

Things to keep in mind

• Fundamental strength - Choose companies with solid financial, able management and sustainable competitive advantage. Analyse revenue growth, profitability, leverage, cash flows and return ratios.
• Valuations - Invest in shares trading at reasonable valuations relative to projected earnings growth. Avoid overpriced stocks.
• Growth prospects - Favour stocks in growing industries and with strong future outlook.
• Diversification - Maintain adequate sector, market cap and geographic diversification.
• Liquidity - Prefer stocks with good trading volumes for easy entry and exit.
• Corporate governance - Select firms with high management credibility, accountability and transparency.
• Risk profile - Include stocks matching your individual risk appetite and return objectives.

Common mistakes to avoid as a new investor

• Acting on advice without research - Don't blindly follow stock advices. Independently analyse every stock.
• No diversification - Don't put all money in just 1-2 stocks. Diversify across sectors, market caps and financial styles.
• Ignoring valuations - Don't invest in overvalued stocks expecting prices to rise indefinitely. Consider current P/E, P/B ratios before investing.
• Letting emotions drive decisions - Don't be influenced by greed or fear. Follow a disciplined investing approach.
• Overtrading - Frequently buying and selling stocks leads to transaction costs and taxes that hurt returns. Be a patient, long-term investor.
• Using leverage unwisely - Avoid investing with borrowed money as a beginner. Leverage magnifies both gains and losses.

Guidance for portfolio management

Instead of actively picking individual stocks, investors can also consider investing through mutual funds. Mutual funds offer diversification across stocks and sectors while providing the convenience of professional management. They allow investors to participate in stock markets with a relatively hands-off approach. Below is a comparison.

Parameter	Direct stock investing	Investing through mutual funds
Diversification	Need to build own diversified portfolio	Diversification inherent based on fund portfolio
Expertise required	Need expertise in stock analysis and valuation	Expertise of fund managers utilised
Time required	Regular monitoring of stocks required	Lower time commitment as monitoring done by fund house
Costs	Brokerage and transaction costs incurred	Fund management fees applicable
Control	Full control over portfolio composition	Limited control as portfolio managed by fund
Risk profile	Risks depend on portfolio composition	Risks depend on fund portfolio and category
Liquidity	Can sell stocks quickly on exchange	Redemptions depend on fund rules

Conclusion

Equity investing requires diligent research, patience and discipline. Review your portfolio periodically and rebalance to align with financial goals and risk tolerance. Opt for mutual funds and index funds if you lack time for active stock monitoring. With a suitable approach, a diversified share portfolio can help you meet your long-term financial targets.

Frequently Asked Questions:

What is the minimum amount needed to start investing in the share market?

You can start investing in shares with as little as Rs. 500. Invest small monthly amounts via Systematic Investment Plans (SIPs) offered by brokers. Gradually increase invested amounts as you gain experience.

How many stocks should a beginner include in their portfolio?

As a beginner, start with a compact portfolio of 5-10 stocks across different sectors. Hold 8-12 stocks in a medium-sized portfolio.

Should I focus on large-cap, mid-cap or small-cap stocks as a beginner?

Beginners could allocate around 60-70% to large-cap stocks for stability. Invest the rest in a mix of high-potential mid and small-cap stocks to improve return potential.

What is the ideal time to hold shares in a portfolio?

For long-term wealth creation, experts suggest holding stocks for at least 3-5 years. Review holdings periodically but avoid frequent buying and selling.

How often should I rebalance my share market portfolio?

Aim to rebalance your portfolio at least once a year. Changes in market conditions may warrant rebalancing more frequently, like every 6 months.

What are the risks involved in share market investing?

Key risks are market risk, individual stock risk, liquidity risk, sector risk and inflation risk, etc. Diversify sensibly to mitigate these risks.

Can I build a portfolio solely with index funds or ETFs?

Yes, you can build a diversified, low-cost portfolio using just index funds and ETFs based on market cap and sector indices.

What is the difference between growth stocks and dividend stocks?

Growth stocks have higher earnings growth but pay low or no dividends. Dividend stocks offer regular income through dividends but have lower growth. Include both types in your portfolio.

How do I know when to sell a stock?

Consider selling if the stock falls below your purchase price, fundamentals deteriorate, it becomes overvalued, or you need funds for better opportunities.

Is it safe to rely on stock advice from friends or social media?

No, do your own thorough research before investing. Guidance can provide stock ideas but analyse fundamentals and valuation yourself before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.