Build a long term portfolio through focus on sectors

In some of my blog posts I have covered the topic of building a portfolio for a new investor. While there are many ways to do this, building a long term robust portfolio is best done through sectoral focus. This has several advantages and one should keep these in mind while building the portfolio. Firstly, investing in a few important sectors will ensure that your portfolio is a representative one and reflects the indices in some manner. Secondly, a combination of such stocks will act as a natural hedge against any serious downfall in the markets. Thirdly, it will be easy to review and change such a portfolio as you are having both the industry and company dimension to look at.

Which will be the sectors to put in money now? Given the economy and demography of India, anything which is related to the domestic infrastructure building or domestic consumption will be great areas to bet on. Remember, you are building a portfolio for the long run, it does not matter if it tanks by 20 % in the present year. The important thing is to identify good companies in the sector – these must have good market presence and asset base to ensure longevity in a positive manner. Avoid flashy companies where results go all over the place and which are in high debt.

For people starting off here is a set of sectors and some suggested companies in them :-

  • Financial sector (Banks)
    • Large private bank – choose between HDFC Bank / ICICI / Kotak / IndusInd
    • Large PSU bank – SBI / PNB
    • Smaller private banks – Yes Bank / Federal Bank / RBL
  • Housing Finance companies
    • LIC Housing Finance / HDFC
    • Indiabulls Housing Finance
  • Cement / Paint companies
    • ACC / Ultratech 
    • Heidelberg / Ambuja
    • Kansai Nerolac / Asian Paints / Berger Paints
  • Auto companies
    • TVS Motors / HeroMotocorp
    • Maruti / M & M
  • Pharma companies
    • Cipla / Lupin / DRL
    • Shilpa Medicare
    • Ajanta / Granules / Aurobindo
  • FMCG
    • Marico / Dabur
    • HUL / ITC
  • Engineering
    • L & T
    • BHEL / BEML
  • IT Services
    • Infosys / TCS
    • Hexaware / KPIT / Mindtree

Avoid Telecom companies and also any other businesses which are cyclical in nature like Sugar and other agro based ones.

Once you have the above framework, all you need to do is to get a low cost Demat account where you can buy stocks without paying high brokerage or annual charges. Based on how much money you have, decide on a quarterly allocation of funds and start buying based on the right time. Remember, you always buy in small lots and check the DMA figures to make sure there is some basic logic to the price. Also, do not go overboard on the number of stocks. You should buy from each of the above but not more than 2/3 from each of them.

Let me give a typical portfolio created out of this strategy :-

  • HDFC Bank
  • SBI
  • Federal Bank
  • Indiabulls Housing Finance
  • Kansai Nerolac
  • Ultratech Cement
  • TVS Motors
  • Maruti
  • Cipla
  • Shipa Medicare
  • Marico
  • ITC
  • L & T
  • BEML
  • Infosys
  • Mindtree

These 16 stocks should be a good one to go with, though you can definitely change some as per your personal preferences. For example, you can replace Maruti by M & M and Mindtree by Hexaware and ITC by HUL and the basic nature of the portfolio will not be altered. Try to have only about 16-20 stocks as with any more you will be spreading the portfolio too thin. In any case, you will review the portfolio once every year and can replace some stocks if you are not happy with their performance.

What should be the investment in this portfolio. It can be anything really but I think you need to invest about 25-50 K in every stock for it to be meaningful. Ideally you should build up this portfolio between now and 2019 end. So we are talking about 4-8 lacs over the next 15 months. If you do not have these resources, you can still build a portfolio with above logic but lesser number of stocks. Put in 1-2 lacs in about 4-8 stocks to start with and you can keep adding more as and when you get money available.

Now to the million Dollar question – how will this portfolio perform in the long run? Well, though it is difficult to predict equity performance over any duration, for 10 years it becomes a little easier. At a conservative estimate this portfolio, with a thorough annual review and change, should deliver at least 15 % annual growth. So a 8 lac portfolio will become about 32 lacs in 10 years. You can therefore assume a multiple of 4 to your invested amount. 

This is a great time to build a portfolio by investing in good stocks. If you have a goal in 10 years time of 40 lacs, just build a portfolio of 10 lacs with these stocks and let the markets do the rest. If you are just starting off and can invest only 2 lacs over the next year then do so – maybe in 10 years you can buy a car of your choice.

I hope to see you getting started today so that you reap the benefits in 2019 !!

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7 thoughts on “Build a long term portfolio through focus on sectors

  1. Hi Rajshekhar,
    I am a total fan of your articles and I try to keep up with your posts and insights which I find far more meaningful as compared to most other ‘gyan-giving’ posts!

    I was wondering if we could request you to do a similar write up on mid and small-cap stocks for building a long-term portfolio. The reason is, there will be many others like me, who would already have a decent mutual fund exposure and may be new (ish) to investing directly in Equity. So it doesn’t make muchs ense to stick to Large cap alone from long term perspective.

    So, in my case, I started out early this year and hope to finish building my portfolio in the next 6 months or so. While I have identified various stocks (sector-specific again and that’s why I am so impressed and intrigued by your post), I remain unsure lets say between a Gabriel / Jamna Auto / Minda and so on.

    I obviously understand the risks associated and am willing to up my learning curve by monitoring my new portfolio.

    Thanks much,
    Keep the flow going,
    Himani Jain
    Interior & Furniture Designer

    Like

  2. do you suggest an index fund for this purpose, It also can give around 15% without all this pain’s for a newbie.
    example index fund is icici nifty next 50 or uti nifty next 50 or reliance junior bees ETF.

    Like

    • No, I do not think Index funds have done well in the Indian context. Invest in MF schemes but only the actively managed ones. As for stocks, go for them directly over time – you will learn as you go along and it will be a rewarding experience to build your own portfolio.

      Like

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