What is the Optimal Equity Investment Percentage in Your Portfolio | Motilal Oswal
What is the Optimal Equity Investment Percentage in Your Portfolio | Motilal Oswal

An Ideal Percentage of Equity Investment in Your Portfolio

Although it may seem to you that several individuals have opinions about an “ideal” or “right” amount of equities to have in any given portfolio, this couldn’t be further from the truth. The right amount of equity to have in your financial portfolio depends on numerous factors, like your investment and country of residence and your investment, the time horizon of your particular investment, conditions of the markets, and your ability to read news of the markets and be updated on your specific holdings.

What Investors Agree On

Most investors tend to diversify assets and capital into various investment channels for the main reason of mitigating exposure to risk. This is called diversification of assets into different instruments, specifically as it allows investors to decrease exposure to unsystematic or “incalculable” risk. Unsystematic risk is that which is associated with a specific company or an industry. Investors agree that they cannot diversify what is called systematic risk, like an economic recession dragging the whole markets down into the ground. Nonetheless, modern portfolio theory, as studied by fields of academic research, shows that broadly diversified equity in a portfolio can reduce, effectively, unsystematic risk to nearly nil degrees, and still maintain the exact expected level of returns that an excessively risky portfolio could possess. The more the percent of equity you have in your financial portfolio, the lower is your exposure to unsystematic risk. A portfolio of, say, 15 stocks, primarily those across a range of sectors/industries, is a lot less risky than a financial portfolio of just two or three stocks.

What About Transaction Fees?

While determining the percentage of equity in a portfolio, you have to consider the transaction costs of having more stocks to hold on to. The more stocks you have, the more transaction fees can add up, so an effective tactic is to have a minimal number that is just about necessary to remove their unsystematic risk exposure. How can you tell how much this amounts to? There is no fixed number, but you can calculate a reasonable range. In online stock trading, investors agree that you should have around 20 to 30 diversified stocks. However, with dynamic brokers like Motilal Oswal offering you low transaction fees from your online trading and broking activity, you can well afford to hold close to 40 to 50 stocks in your portfolio. You should note that all these assertions are founded on historical data concerning the general behaviour in the markets. There is no guarantee that this equation will work for the next 10 years as it did in the past 10, but it is something to go by. 

Stick to a General Rule

Going by a general rule, most equity investment is done with at least 15 to 20 stocks in a portfolio, for professional and retail investment. There is no magic number that pertains to the stocks you should own in your portfolio, but when you invest with a proficient and expert-in-the-field broker like Motilal Oswal, you will learn how to diversify your portfolio in a way that earns you good returns. 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

angle-up