Mastering Portfolio Construction: What is it And Why do You Need it
- Introduction
- What Is Portfolio Construction?
- Understanding Portfolio Construction Meaning: Why Do You Need It?
- Portfolio Construction Process
- Examples
- Factors To Consider For Portfolio Construction
- Final Thoughts
Introduction
In a world of numerous investment options, finding a suitable set of assets for portfolio can be a challenging task. And with wealth in millions and billions, this decision can make you overthink. A report by the India Wealth Survey 2025 suggests that although High-net-worth individuals (HNIs) in India are financially literate, they still struggle with managing their finances and money-related decisions. This needs emphasis on systematic investment planning, and that's where the concept of portfolio construction comes in.
Through this blog, understand the portfolio construction meaning, why you, as an HNI, require it, factors one should consider when constructing a portfolio, and much more. Keep reading to explore more!
What Is Portfolio Construction?
Portfolio Construction refers to a systematic method of developing a portfolio from scratch. Here, the portfolio manager understands the client's needs, risk levels, and investing ability before selecting the assets mix. In simple terms, it is a process of investing funds (diversifying) in a variety of assets that match your profile. However, building a portfolio involves several steps, each requiring various iterations and modifications.
Understanding Portfolio Construction Meaning: Why Do You Need It?
Technically, Portfolio Construction is analyzing a person's financial goals and helping them build a portfolio from scratch. It involves carefully selecting and allocating assets—such as equities, debt, real estate, and alternative investments for the portfolio. Think of it as a nutritionist telling you about what your ideal diet plan should include. For that, they may also suggest a mix of fats, proteins, vitamins, carbohydrates, and other essential nutrients. Here, the difference lies in the fact that the portfolio manager will recommend a mix of different assets for your portfolio.
At its core, portfolio construction answers three key questions:
- What are you investing for? (Goals)
- How much risk can you handle? (Risk Appetite)
- What mix of investments suits your needs? (Asset Allocation)
Portfolio Construction Process
Based on this evaluation, the entire portfolio construction process happens in the following steps;
1.Goal setting
The first step is to identify the investor's goals and objectives. After understanding what's the risk profile, investment horizon, and asset allocation, it is possible to find the apt set of assets for the portfolio.
2.Asset allocation
The next step in the portfolio construction process is to search for an asset mix that
is apt to the investor's profile. It decides how much percentage of funds will go to
different asset classes. For example, the fund manager may choose to deploy a 60-equity
- 40 debt strategy for asset allocation.
Here, the portfolio manager may bring in different investment strategies to enhance the
HNI's portfolio worth. Some of the strategies include tactical asset allocation,
strategic approach, risk-based portfolio construction, Barbell strategy,
Black-Litterman Model, etc.
3.Diversification
Diversification and Allocation may sound similar, but they act differently. One answers where to invest, and the other answers how much to invest. In other words, diversification helps you decide where to invest (in assets like equity, stocks, bonds, currencies, real estate, etc.) and how much percent of the funds will go to each defines asset allocation. This stage is a setpoint to strike the balance between the assets and the risk metric.
4.Risk management
Predeciding what's going on in the HNI's portfolio, fund managers also look at the risks associated with the assets. Once analyzed, they try to match it with the portfolio's structure through some tactics like hedging.
5.Rebalancing
Once a financial portfolio is constructed, it requires periodic allocation to match the desired performance. At this point, there can be necessary changes made if the portfolio demands.
Examples
The following example explains the concept of portfolio construction in brief:
Suppose Mr. A is a banking professional living in his mid-30s with a salary of ₹55 lakhs. He wishes to have a new car and house, fund his daughter's education, and, lastly, retire at 60. He already saves around ₹6 lakh every year, but he still feels it's not sufficient to suffice his goals. Hence, he contacts a portfolio manager to help him with portfolio construction. Depending on the list of goals attributed, risk tolerance levels, and investment horizon, the fund manager constructs a portfolio for Mr. A.
But, in this example, ever wondered why Mr. A opted for portfolio construction? Well, matching dreams with investment outcomes is uneven at times. And that's what reality speaks.
The 2025 India Wealth Survey states that 43% of Indian HNIs are saving less than 20% of their post-tax income. This gap supports another Wealth Index report released this year, which discusses how the preferences of HNIs and UHNIs have also changed. Presently, HNIs prefer income generation (39 percent), followed by capital appreciation (32 percent). At the same time, UHNIs are more focused on capital appreciation as their primary goal, followed by wealth preservation.
Factors To Consider For Portfolio Construction
As an investor, there are several factors to consider before seeking professional help with portfolio construction. These are known as 4Ps:
- People - It is more concerned with the fund manager managing the strategy. It also considers their experiences and capabilities.
- Philosophy - Understanding what the strategy is trying to achieve is also important. For example, is it meant to seek your goals and growth, and how does it happen eventually?
- Process - It is also vital to see how the strategy pursues its objectives and diversifies your money across various assets.
- Performance - Lastly, understand the metrics on how this strategy would likely underperform/outperform in different market situations. Also, does the level of risk taken to match the relative outcome?
Final Thoughts
Portfolio Construction is not just putting different assets under one roof but a strategic design of your investments. As and when you age, your financial goals do change, and so does your need for funds in the future. Hence, constructing and rebalancing your portfolio at timely intervals can be of great importance. If you need to build your portfolio, consider consulting with professionals for additional guidance.
Note: “The information, illustrations, and calculations provided in this blog are for general informational purposes only and should not be construed as investment advice or a recommendation to buy, sell, or hold any financial product. All examples and figures are purely illustrative and may be based on assumptions that can change over time. Actual results may vary and are subject to market risks and other factors. Readers are advised to independently verify all information and consult a qualified financial advisor before making any investment decisions. Neither the author nor ARPCG shall be held responsible for any loss or liability arising from the use of this information.”
