Should I create a diversified portfolio by investing 5-10 per cent in each sector? Or should I invest in a few sectors with a limited number of stocks? What's the best strategy to get the maximum gain from the stock market?
- Gajanan Vijay Jadhav
Investing in all sectors in the name of diversification is not a sound strategy. If you look at fund portfolios, fund managers manage a few hundred to a few thousand crores of rupees. Even they do not invest in all sectors. So clearly, selectivity matters here. The right approach to go about it would be first to identify a few investment-worthy stocks. For a retail investor building a stock portfolio, perhaps about 10-15 stocks can be an adequate portfolio in itself. The most important thing is to select fundamentally strong and growing companies that are investment-worthy for your long-term stock portfolio. You need to have deep convictions on the stocks you wish to buy, understand these companies and how they earn money, and why their stock prices are likely to appreciate in the coming years.
Once you develop convictions on these stocks, sector allocations could be done at a later stage. While building your portfolio and assigning weights to each of these stocks in your portfolio, you can have a bearing on the sector weights. Assign weights to these stocks so that any particular sector does not end up having a large share in your portfolio. Following this method, you can build your stock portfolio, and if you find all this too complicated, a mutual fund is always a good alternative.