Investing

Portfolio Management Services (PMS) in India have grown rapidly, with Assets Under Management (AUM) rising from ₹15.40 lakh crore in January 2019 to ₹32.22 lakh crore by January 2024. With PMS assets projected to exceed ₹100 lakh crore by 2030, investors are increasingly considering this customized wealth management option. 

Unlike traditional investment tools, PMS builds customized portfolios to align with investors’ financial goals, risk tolerance, and market opportunities.

But is PMS the right fit for you? Let’s explore the benefits of PMS alongside its potential drawbacks.

Read More: Portfolio Management Services: A Beginner's Guide

Benefits of PMS (Portfolio Managed Services)

Professional Expertise at Your Service

Professional management is the cornerstone of PMS. Seasoned portfolio managers bring years of experience and market knowledge to curate portfolios that align with clients’ financial goals. Their expertise ensures that investments are guided by data-driven strategies and deep market insights.

Tailored Investment Strategies

Unlike mutual funds that adopt a one-size-fits-all approach, PMS offers customized solutions. The portfolio is designed based on your unique risk tolerance, investment horizon, and objectives. This personalization maximizes the potential for growth while aligning with your comfort level.

Transparency and Control

One significant benefit of PMS is its transparency. Investors receive detailed reports on portfolio performance, holdings, and transactions. Additionally, direct ownership of securities provides greater control, unlike mutual funds, in which you own fund units.

Active Portfolio Management

Markets are dynamic, and PMS ensures your portfolio stays ahead of the curve. Portfolio managers actively monitor and rebalance investments to adapt to market fluctuations, ensuring opportunities are seized and risks mitigated.

Diversification for Risk Management

Diversification is key to minimizing investment risks. PMS ensures your portfolio is spread across various asset classes, sectors, and industries, reducing the impact of poor performance in any area.

Potential for Higher Returns

PMS’s personalized and actively managed nature often translates into potential higher returns. PMS seeks to outperform traditional investment avenues like fixed deposits or mutual funds by focusing on growth-oriented opportunities and market trends.

Access to Exclusive Investment Opportunities

PMS opens doors to unique, high-growth potential opportunities. These may include niche stocks, emerging sectors, or strategies unavailable in conventional investment platforms, giving investors a competitive edge.

Dedicated Support and Relationship Management

When you choose PMS, you’re not just getting investment management; you’re gaining a partner in your financial journey. Dedicated relationship managers offer personalized guidance, address queries, and ensure a seamless investment experience.

Regulatory Assurance

PMS in India operates under the strict guidelines of the Securities and Exchange Board of India (SEBI). This regulatory framework ensures transparency, accountability, and investor protection, making it a reliable option.

Understanding the Drawbacks of Portfolio Management Services (PMS)

While there are several benefits of PMS, it has drawbacks too. Like any financial product, it has limitations that prospective investors should carefully consider before considering investing in any PMS.

High Investment Threshold

One of the most significant barriers to entry in PMS is the high minimum investment requirement. In India, SEBI mandates a minimum investment of ₹50 lakh for PMS accounts. This makes it inaccessible for retail investors or those with smaller investable surpluses. For many, this threshold can feel restrictive and excludes them from benefiting from PMS’s personalized approach.

Higher Costs and Fees

The premium nature of PMS often comes with substantial management fees and other charges. Typically, PMS providers charge:

• Management Fees: A fixed percentage of assets under management (AUM) or performance-based fees.
• Transaction Costs: Charges for buying and selling securities.
• Custodian Fees: For safekeeping and management of assets.

These costs can significantly impact returns, especially if the portfolio underperforms or if market conditions are unfavorable.

Lack of Liquidity

PMS investments are generally less liquid compared to mutual funds. Exiting a PMS portfolio can be cumbersome, as the process may involve selling individual securities. This can lead to delays, particularly during market downturns when liquidity dries. Investors needing immediate access to funds might find this lack of liquidity a disadvantage.

Market-Dependent Returns

While PMS often promises higher returns, it is not immune to market risks. The performance of a PMS portfolio depends heavily on market conditions and the skills of the portfolio manager. Even a well-managed PMS can incur losses in bearish or volatile markets, leaving investors disappointed.

Risk of Manager Bias

In PMS, the success of your portfolio often hinges on the skills and judgment of the portfolio manager. However, there’s always a risk of manager bias or overconfidence, which can result in suboptimal investment decisions. If the manager’s strategy fails, it can adversely impact the portfolio’s performance.

Is PMS Right for You?

The decision to opt for PMS depends on your financial profile, goals, and risk appetite. If you are an HNI looking for personalized strategies and higher returns, PMS could be a valuable choice. However, consider the associated costs, risks, and liquidity constraints before committing.

The benefits of PMS make it a compelling option for HNIs seeking tailored financial solutions. However, its limitations are vital, too.

FAQs

Buying your first house is an exciting milestone, but it’s also a financial challenge that requires careful planning. As a first-time home buyer, understanding the right money tips for first-time home buyers can make all the difference between a smooth journey and a stressful experience. From setting a budget to exploring financing options, following these tips will help you make informed decisions, save money, and achieve your homeownership goals.

This guide dives deep into the financial rules every first-time home buyer should know, ensuring you are prepared to make one of the most significant investments of your life.

Understand the Price-to-Income Ratio

The price-to-income ratio is a critical rule when it comes to purchasing your first home. This ratio simply means that the cost of the house should be no more than 5 times your household’s annual income. For example, if your household income is ₹10 lakh a year, then the cost of your home should ideally be no more than ₹50 lakh.

While this rule may sound simple, it can be quite challenging to follow, especially in metropolitan cities in India where property prices have skyrocketed in recent years. In cities like Mumbai, Delhi, and Bangalore, the cost of real estate is often much higher than this ideal ratio. This is where considering satellite towns or Tier 2 cities could be a more practical solution. Cities like Pune, Chandigarh, or Coimbatore offer more affordable property options while still providing the amenities and infrastructure that make them attractive places to live.

By sticking to the 5x rule, you ensure that your home loan and its repayment does not overwhelm your finances, leaving you with enough resources for other needs such as saving for retirement, emergencies, or your children’s education.

Save for a Higher Down Payment

When applying for a home loan, most banks will ask you to contribute a down payment of around 20-25% of the home’s value. However, it is essential to go beyond the minimum and save more. Ideally, you should aim to pay 35% of the total cost of the house as your down payment.

Why does this matter? A larger down payment helps reduce your loan burden and monthly EMI. By putting down a substantial amount upfront, you can reduce the total loan amount, which results in lower interest payments over the life of the loan. This can save you a significant amount of money in the long term.

Furthermore, a larger down payment shows lenders that you are financially responsible and capable of managing debt, which can help you secure better interest rates. It is essential to start saving early and make this extra financial effort for your long-term benefit.

Savings: At Least 50% of the House’s Cost

Owning a home comes with additional expenses that go beyond just the home loan EMI. Maintenance costs, property taxes, utilities, and home insurance can add up quickly. To ensure you can handle these expenses without straining your finances, aim to have at least 50% of the house’s cost saved up.

Here’s how this breaks down:

• 35% of the house price should go toward your down payment.
• The remaining 15% should be kept aside as liquid savings to cover unforeseen financial needs, such as medical emergencies, job loss, or urgent repairs.

Having a robust savings cushion ensures that you can manage your finances smoothly without dipping into your home loan or going into debt when unexpected expenses arise. This buffer also gives you peace of mind as you navigate the initial stages of homeownership.

Monthly EMI: Keep It Below 35% of Your Income

Another important financial rule is ensuring that your home loan EMI does not exceed 35% of your in-hand monthly income. The EMI is a significant monthly financial commitment, and if it consumes too much of your income, you may find it challenging to maintain a comfortable lifestyle.

For example, if your take-home income is ₹1 lakh per month, your monthly EMI should not exceed ₹35,000. Exceeding this threshold could cause financial strain, leaving little room for other expenses such as groceries, education, insurance, and savings. A manageable EMI allows you to comfortably cover other living expenses while still checking your loan obligations.

In cases where property prices are high, such as in metros, it may make sense to adjust your expectations and look for smaller homes or properties in areas with lower real estate costs.

Medical Insurance: Protect Your Family with Adequate Coverage

Finally, as a first-time homebuyer, it is essential to secure a floating medical insurance policy with a coverage of at least ₹25 lakh. While this may seem like a significant expense, the protection it offers to you and your family is invaluable. Medical emergencies can be financially draining, and having sufficient insurance coverage ensures that you’re not forced to dip into your savings or take on high-interest debt during difficult times.

A robust medical insurance plan covers hospitalisation, surgeries, and other medical expenses for your entire family. This is particularly important when you are taking on a long-term financial commitment like a home loan, as any major health emergencies can disrupt your financial plans.

Why These Financial Rules Matter

Following these financial guidelines ensures that your home purchase remains a long-term investment, rather than a financial burden. First-time homebuyers are often so focused on getting their foot in the door of the real estate market that they overlook the importance of maintaining a balanced financial situation. These rules help you avoid falling into debt, allow for better financial planning, and ensure that you can weather unexpected financial challenges.

By adhering to these principles, you are setting yourself up for a stable, financially secure future in your new home.

Conclusion

Purchasing a home is a detailed and often lengthy journey that requires significant time, effort, and resources. However, the rewards make it all worthwhile. The secret to success is having a clear understanding of your financial situation, setting achievable budget goals, and consulting with a financial planner when necessary. By following these financial planning tips for homebuyers, you’ll be on track to turn your dream of owning a home into a reality.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Reviewing your portfolio is an essential practice in the constantly shifting landscape of investing. Similar to a captain who routinely assesses the ship’s direction, you need to evaluate your portfolio regularly to ensure you are progressing steadily towards your financial objectives.

A portfolio review is an essential practice for every investor, regardless of experience level. By regularly conducting a review of your portfolio, you ensure that your investment strategy remains aligned with your financial goals. Whether you are considering an online portfolio review or asking an expert to “review my portfolio,” understanding the importance of this process can significantly impact your financial health and growth. This article delves into why a portfolio review is crucial and how it helps optimise your investments.

Also Read: Porinju Veliyath Portfolio

Why Portfolio Review Matters

A portfolio review is not just a routine check; it’s a strategic evaluation of your investments. It allows you to ensure that your portfolio’s asset allocation aligns with your financial goals and risk tolerance. For instance, market conditions change, and so does your personal financial situation. A review helps in adapting your portfolio to these changes, avoiding potential risks, and seizing new opportunities.

Consider an investor who initially allocated a significant portion of their funds to high-risk equities. Over time, their financial goals might shift towards more stable, income-generating investments. Without a regular portfolio review, this misalignment can lead to underperformance or unnecessary risk.

The Role of Online Portfolio Reviews

With the advent of technology, online portfolio reviews have become increasingly popular. These reviews offer a convenient way for investors to assess their portfolios from anywhere, at any time. Online tools often provide detailed analytics, performance reports, and even suggestions for rebalancing. This digital approach not only saves time but also ensures that you have real-time data to make informed decisions.

For example, platforms like Robo-advisors use algorithms to analyse your investment portfolio and recommend adjustments based on your current financial goals and market conditions. This automated process can be particularly beneficial for novice investors who might find traditional portfolio reviews daunting.

When to Say “Review My Portfolio”

Timing is critical in investment management. Knowing when to review your portfolio can make a substantial difference. Ideally, you should conduct a portfolio review at least once a year or whenever there are significant changes in the market or your personal life.

For instance, major life events such as marriage, the birth of a child, or approaching retirement are pivotal moments that warrant a thorough review of your investments. Additionally, significant market events, such as a recession or a boom in a particular sector, also call for an immediate review to mitigate risks or capitalize on growth opportunities.

The Vital Role of Portfolio Review

Reasons why regularly reviewing your investment portfolio is crucial:

1. Adapting to Market Dynamics: Financial markets are inherently unpredictable, with conditions shifting due to factors like geopolitical tensions, economic reports, or unexpected global events. Regular portfolio reviews help you navigate these changes, ensuring your investments are aligned with current market realities.

2. Managing Risk Effectively: Effective portfolio management involves continual assessment and management of risk. As your personal circumstances, financial objectives, or the broader market environment evolve, your risk tolerance may also shift.

3. Ensuring Alignment with Financial Objectives: Financial goals are fluid and can change with life’s milestones—career shifts, family growth, or economic shifts. A portfolio review ensures your investment strategy stays in sync with your current financial aspirations.

4. Evaluating Performance: Monitoring your investment performance is essential for gauging their success in achieving your financial targets. This ongoing evaluation helps you identify underperforming assets, enabling you to make necessary adjustments to optimize returns.

5. Maintaining Behavioural Discipline: Investors are often influenced by emotional responses to market movements, leading to impulsive decisions deviating from a well-structured investment plan.

Periodic portfolio reviews instill a disciplined approach, helping you focus on your long-term goals despite short-term market volatility. This structured process minimizes the impact of emotional decision-making and promotes a rational investment strategy.

6. Considering Estate Planning: Life changes such as marriages, births, or the passing of loved ones can necessitate adjustments to your investment portfolio to reflect new estate planning needs. Regular reviews ensure that your portfolio aligns with your family dynamics and estate planning goals, safeguarding your legacy for future generations.

Steps to Conduct a Portfolio Review

• Evaluate Current Holdings: List all your investments and assess their performance. Look for assets that are underperforming or no longer align with your goals.

• Check Asset Allocation: Ensure your portfolio is diversified across different asset classes. Proper diversification helps spread risk and enhances potential returns.

• Assess Risk Tolerance: Your risk tolerance may change over time due to age, financial situation, or market conditions. Adjust your portfolio to match your current risk appetite.

• Rebalance Portfolio: Based on your findings, rebalance your portfolio by selling off some assets and investing in others. This process helps maintain your desired asset allocation.

• Set Future Review Dates: Regular reviews are crucial. Set reminders to review your portfolio periodically, such as quarterly or annually.

In conclusion, a portfolio review is an indispensable tool for any investor. It helps ensure your investments are aligned with your financial goals, manage risks, evaluate performance, and capitalize on new opportunities. You can optimize your investment strategy and secure your financial future by conducting regular portfolio reviews, especially through an online portfolio review. Whether you aim to review my portfolio or seek professional assistance, staying proactive is the key to successful investing.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

When it comes to investing in stocks, knowledge is key. The more you understand about a company’s financial performance, the better decisions you can make about where to put your money. One of the most important things to know is the company’s Earnings Per Share (EPS). 

EPS gives you a quick look at how profitable a company is, which is helpful when trying to determine if a company is a good investment. In this guide, we’ll explain what EPS is all about, how to calculate it, and why it matters so much for your investment portfolio.

When it comes to investing in stocks, knowledge is key. The more you understand about a company’s financial performance, the better decisions you can make about where to put your money. One of the most critical financial metrics every investor should know while investing is earnings per share (EPS).In this guide, we’ll dive deep into what is earnings per share, how to calculate earnings per share, why it’s important, and how investors use it to assess the potential of stocks. By the end, you’ll understand how this single number can provide powerful insight into a company’s profitability and growth potential.

What is EPS?

Simply put, EPS tells you how much profit a company makes for each share of its stock. Think of it like this: if a company has a birthday cake (its profits), EPS shows you how big of a slice each shareholder gets. A bigger slice (higher EPS) usually means the company is doing well and making more money, which investors like to see.

How to Calculate EPS

Calculating EPS might seem complicated at first, but the basic formula is pretty easy:

EPS = (Net Income – Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

Let’s understand what each part of this formula means:

• Net Income: The company’s total profit after paying all its bills and expenses, like salaries, rent, and the cost of making its products.
• Preferred Dividends: Some companies have special types of stock called “preferred stock.” These stockholders get paid dividends first, subtracting their dividends from the total profit before calculating EPS for regular shareholders.
• Weighted Average Number of Common Shares Outstanding: This considers any changes in the company’s number of shares over time. Companies sometimes issue more shares or buy back some of their existing shares, so this part of the formula ensures the EPS calculation is accurate.

Why EPS Matters?

EPS is a really important tool for investors. Here’s why:

• Checking Profitability: A higher EPS usually means a company is making more money, which is a good sign for investors. It suggests that the company efficiently manages its expenses and generates strong profits.
• Comparing Companies: EPS helps you compare how profitable different companies are within the same industry. This can help you find the companies doing the best relative to their competitors. For example, if two companies make smartphones, you can use EPS to see which is more profitable.
• Tracking Performance: By looking at EPS over time, you can see if a company’s profits are growing or shrinking. This helps you understand if the company is on the right track. If a company’s EPS consistently increases, it could signify a healthy and growing business.

ALSO READ:

Fundamental Analysis

EPS in Finance: Understanding the Bigger Picture

While a higher EPS is generally favorable, it’s important to consider it in context. Financial experts often analyze EPS Finance metrics to gain deeper insights into a company’s financial performance.

• Industry Comparisons: It’s helpful to compare a company’s EPS to the average EPS of other companies in the same industry. This shows how the company is doing compared to its competitors. For instance, a tech company might have a higher EPS than a retail company, but that doesn’t necessarily mean it’s a better investment.
• Future Growth: Even if a company has a lower EPS now, it might be a good investment if expected to grow. A new company might have a low EPS initially, but if it has a promising product or service, its EPS could increase significantly over time.
• Economic Factors: A recession can affect a company’s EPS, even if the company is generally doing well. During tough economic times, people might buy less, which could lead to lower profits for companies.

Using EPS for Smart Investing

EPS is often used with other financial measures to make informed investment decisions. A few of the common measures combined with EPS are.

• Price-to-Earnings (P/E) Ratio: EPS alone tells you how much profit a company generates per share, but the P/E ratio places it in context with the stock price. The P/E ratio shows how much investors are willing to pay for each rupee of a company’s earnings. A high P/E ratio usually makes investors optimistic about the company’s future. You can use a financial calculator to calculate these ratios easily. 
• ROE (Return on Equity): EPS tells you about profitability, but ROE tells you how efficiently a company uses shareholders’ equity to generate that profit. A high ROE relative to EPS suggests the company efficiently leverages its capital to drive earnings.
• Price-to-Sales (P/S) Ratio: EPS focuses on profitability, but what if a company isn’t profitable yet? The P/S ratio can tell you how the company is valued relative to its sales, even if it doesn’t have positive earnings. The P/S ratio compares a company’s market cap to its revenue, offering another perspective on valuation. The P/S ratio might offer a clearer view of potential value in cases where EPS is negative or low. 

Different Types of EPS

There are different ways to look at EPS:

• Trailing EPS: Trailing EPS reflects a company’s earnings over the past 12 months, providing investors with a clear historical perspective of its profitability. By analyzing this figure, you can gauge the company’s recent performance. It’s a valuable metric for understanding trends and comparing past performance to other companies within the same industry.
• Forward EPS: Forward EPS: Forward EPS predicts a company’s future earnings, giving an idea of its growth potential. It helps assess companies planning expansions or new projects. While not certain, forward EPS helps investors estimate how well a company might perform and make smarter decisions about its prospects.

Conclusion

EPS is a crucial metric for anyone investing in stocks, providing insights into a company’s profitability and growth potential. However, it’s essential to consider other considerations when making investment decisions. 

A well-rounded approach enables you to make informed choices and build a strong investment portfolio. If you need assistance with your stock investments, a stock investment advisor can offer expert guidance to help you achieve your financial goals.

Earnings per share is a critical indicator for assessing a company’s profitability and potential as an investment. By understanding what is earnings per share, using the earnings per share formula, and knowing how to calculate earnings per share, investors gain valuable tools to analyze performance.

Always remember that while EPS is powerful, it works best when considered with other financial ratios and market factors. A balanced investment strategy that includes EPS analysis can lead to more informed and effective decision-making.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Introduction:

Overdiversification is a common pitfall many investors fall into, often leading to diluted returns and a lack of focus in their investment strategy. While diversification is essential for risk management, too much can negate potential gains.

This article delves into the nuances of over-diversification, helping you strike the right balance for your portfolio. We will explore practical steps to avoid over diversifying and illustrate how optimal diversification can enhance investment outcomes.

Understanding Over diversification

Diversification is a well-known strategy in the investment world aimed at spreading risk across various assets to mitigate potential losses. However, over diversification occurs when an investor holds too many different assets, leading to diminished returns and increased complexity in portfolio management. This often results in a situation where no single investment contributes meaningfully to the overall performance, reducing the potential for substantial gains.

Why Do Investors Overdiversify?

• Fear of Risk: Investors often over-diversify to avoid risk, believing that more assets equal less risk. While diversification reduces risk to a point, overdiversification dilutes the impact of high-performing investments.

• Lack of Knowledge: Some investors lack the knowledge to identify high-potential investments, so they spread their funds thinly across numerous assets.

• Advice Overload: The abundance of financial advice can lead investors to overcomplicate their portfolios, adding unnecessary assets based on trends or opinions.
  

Signs of Overdiversification

• Excessive Number of Holdings: Investors with excessive stocks or funds often find it challenging to manage and monitor each holding effectively. For instance, holding 50 or more stocks across various sectors may not significantly reduce risk compared to a well-selected portfolio of 15-20 stocks.

• Heightened Complexity: Handling a portfolio with excessive investments can rapidly become daunting. Monitoring performance, regularly rebalancing, and keeping track of numerous assets adds complexity to investment management. Moreover, frequent transactions may increase fees, making the process more labor-intensive and expensive.

• Low Correlation and Redundancy: Diversifying across multiple sectors or asset classes with low correlation can be beneficial. However, investing in too many similar assets, like multiple mutual funds with overlapping strategies, can lead to redundancy, offering no additional risk reduction.

• Diminished Returns: Overdiversification can lead to a scenario where the portfolio mirrors the market average, thus underperforming compared to a more focused strategy that targets higher growth opportunities.

• Suboptimal Capital Allocation: Over-diversification often locks a portion of your capital in assets that either underperform or remain stagnant. As a result, your portfolio may not be operating at its highest potential, preventing you from maximizing the returns on your investments.

The Optimal Diversification Strategy

To avoid overdiversification, investors should focus on creating a well-balanced portfolio that includes diverse asset classes but remains manageable.

• Core-Satellite Approach: This strategy involves building a core portfolio with broad, low-cost index funds or ETFs that provide market exposure, complemented by satellite investments in specific sectors or high-growth opportunities. For example, an investor might allocate 70% of their portfolio to core holdings and 30% to satellite investments.
• Regular Portfolio Review: Regularly reviewing and rebalancing your portfolio ensures it remains aligned with your investment goals and risk tolerance. This process helps identify and eliminate redundant holdings, thereby streamlining the portfolio.
• Focus on Quality Over Quantity: Rather than holding numerous investments, focus on high-quality assets with strong growth potential that align with your investment strategy. For instance, selecting 10-15 well-researched stocks can offer better returns than a diluted portfolio of 50 stocks.

Diversification vs. Overdiversification

Aspect	Diversification	Overdiversification
Number of Assets	Balanced	Excessive
Risk Mitigation	Effective	Diminishing returns
Portfolio Management	Manageable	Complex and cumbersome
Cost Implications	Reasonable	High

Diversifying Across Various Asset Classes

To mitigate risk and optimize returns, investors and portfolio managers often spread their investments across multiple asset classes. This strategic allocation involves determining the appropriate proportion of the portfolio for each category. Key asset classes include:

• Equities: Investments in shares of publicly traded companies.
• Fixed-Income Securities: Such as government or corporate bonds, which provide regular interest payments.
• Real Estate: Investments in land, buildings, and natural resources, including water and mineral rights.
• ETFs (Exchange-Traded Funds): These funds track indices, commodities, or sectors and are traded on stock exchanges.
• Commodities: Physical goods such as metals, energy resources, and agricultural products essential for production.
• Cash and Equivalents: Liquid investments like treasury bills, certificates of deposit (CDs), and other short-term, low-risk financial instruments.

Striking the Right Balance Between Diversification and Overdiversification

Over-diversification occurs when an investor spreads their investments too thin across numerous stocks or mutual funds, resulting in diminishing returns outweighing risk reduction benefits. On the other hand, optimal diversification involves striking the right balance—creating a sufficiently diverse portfolio to mitigate risk while still being concentrated enough to harness the potential for significant returns.

Let’s explore this concept with an example:

Consider Investor A, who holds 500 different stocks in their portfolio. While this significantly reduces risk, the sheer number of stocks may also limit the number of high-performing ones, leaving A with a portfolio that delivers modest returns. Eventually, Investor A might find themselves in a situation where their portfolio yields neither significant profits nor losses.

When it comes to mutual funds, a fund that invests in more than 100 companies might not be the best example of optimal diversification. In such cases, it becomes harder for the fund manager to outperform the market, as focusing on too many investments dilutes the chances of achieving higher returns. While having a new fund in your portfolio can be beneficial, too many funds can reduce the overall potential for gain. A highly diversified portfolio might offer safety, but it often limits an investor’s ability to achieve remarkable returns.

In conclusion, overdiversification can undermine financial goals by diluting returns and complicating portfolio management. By understanding the signs of over diversification of a portfolio and implementing targeted strategies, investors can achieve a well-balanced portfolio that maximizes returns while minimizing risk. Focus on quality over quantity, regularly review your holdings, and adjust your plan to maintain optimal diversification.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Looking for upcoming multibagger stocks? Identifying the next multibagger stock is not easy, for any retail investor. It requires a lot of research, strategic foresight, and patience. 

However, there are a few similar characteristics shared by every multibagger stocks currently trading in the market, including Bajaj Finance, Trent, Titan, NBCC, and Zomato, that have helped them become multibagger stocks. 

In this article, we will check- what are multibagger stocks, steps to identify multibagger stocks, and potential multibagger stocks of 2025. Let’s dive in. 

What are Multibagger Stocks?

Multibagger stocks are referred to the stocks of fundamentally strong companies that have multiplied its value by several times over the long term. Typically, a stock is considered multibagger if it has gained by a minimum 100% in the past one year. 

For example, if a stock price increases from ₹100 to ₹1000 in the next 2 years, it will be called a 10-bagger or multibagger stock. 

The term “multibagger” was coined by Peter Lynch is his 1988 book “One Up on Wall Street”. Identifying and investing in a multibagger stock is important for wealth creation and will help you to significantly outperform the broader market. 

What are the Characteristics of Multibagger Stocks?

The following are the characteristics of top multibagger stocks:

Strong Fundamentals: The companies have consistently high earnings growth, low debt levels, and strong free cash flows.

Competitive Advantage: The business of such companies have unique moat, such as proprietary technology, strong brand value, first mover advantage, or a monopolistic position. 

Growth Potential: The company should operate in a sector that offers high growth potential and the market is not saturated. For example, stocks of companies in the coal mining business have less chances of becoming multibagger because of limited upside growth potential because of transition to green energy solutions. 

Strong Leadership: The leadership of the companies should be strong and determined to execute the vision and scale the business to new highs. 

Undervalued Stock Price: The stock should have a valuation (P/E and P/B Ratio) less than the industry peers. 

If you look at all the multibaggers of the last five years- like Trent, Bajaj Finance, Titan, all have the above mentioned characteristics and were available at lower valuations at the beginning. 

Top Multibagger Stocks for 2025

To identify potential multibagger stocks for 2025, we have applied the following parameters:

• It should be a mid-cap stock
• Have shown 3-year Revenue CAGR of more than 15%
• Have shown 3-year PAT CAGR of more than 15%
• Debt-to-equity Ratio should be less than 0.5
• Return on Capital Employed (ROCE) should be greater than 20% and has shown consistent improvement
• And, the Price-to-equity (PE) ratio is less than Industry PE

After applying the filters, we have shortlisted the following potential multibagger stocks for 2025:

• Natco Pharma
• Action Construction Equipment
• Banco Products
• ITD Cementation
• Gulf Oil Lubricants India Ltd.

Natco Pharma

Natco Pharma is a multinational pharmaceutical company with presence in over 50+ countries. It is a potential multibagger stock and is vertically integrated company engaged in the development, manufacturing, and marketing of complex generic medicines, particularly in the fields of oncology, cardiology, and diabetology and active pharmaceutical ingredients (API).

The company is known for its high-quality and affordable medication and recently diversified to agrichemical space. 

CMP (27th December 2024)	₹1,392
Market Cap	₹24,932 crores
3 year Compounded Sales Growth	25%
3 year Compounded Profit Growth	49%
Return on Capital Employed (FY24)	26%

Action Construction Equipment (ACE)

Established in 1995 in Faridabad, Haryana- Action Construction Equipment or ACE is a major player in the manufacturing of hydraulic mobile cranes, mobile tower cranes, material handling equipment like forklifts, road construction equipment, and agriculture equipment.

It is a major supplier of cranes to all leading private and government sector companies, and is likely to benefit from Indian increased capex on infrastructure.  

CMP (27th December 2024)	₹1,446
Market Cap	₹17,222 crores
3 year Compounded Sales Growth	33%
3 year Compounded Profit Growth	63%
Return on Capital Employed (FY24)	36.99%

Banco Products

Incorporated in 1961, Banco Products is a leader in the business of engine cooling and sealing systems both for industrial and automotive applications. Over the years, it has emerged as a top choice of OEM both in India and abroad, most sought in aftermarket, and exports. 

CMP (27th December 2024)	₹1,056
Market Cap	₹7,553 crores
3 year Compounded Sales Growth	22%
3 year Compounded Profit Growth	34%
Return on Capital Employed (FY24)	39.75%

ITD Cementation

The company established its operations in 1931 in India as a branch of TD Cementation Company Ltd., UK. It is in the business of offering design, engineering, procurement, and construction (EPC) services for infrastructure projects in India. 

Clientele of the company include PSA Group, Adani, RVNL, NHAI, ArcelorMittal, Central Public Works Department, IRCON, Airport Authority of India and many more.  

CMP (27th December 2024)	₹532
Market Cap	₹9,131 crores
3 year Compounded Sales Growth	41%
3 year Compounded Profit Growth	170%
Return on Capital Employed (FY24)	27.42%

Gulf Oil Lubricants India Ltd.

Gulf Oil is potential multibagger stock and is a part of Hinduja Group and is engaged in the manufacturing, marketing, and trading of automotive and non-automotive lubricants. It is among top three lubricant companies in India among private players. 

CMP (27th December 2024)	₹1,209
Market Cap	₹5,955 crores
3 year Compounded Sales Growth	26%
3 year Compounded Profit Growth	15%
Return on Capital Employed (FY24)	26.83%

Future Trends and Sectors to Watch For

Analysing the future trends can also help you in identifying potential multibagger stocks. 

For example, in 2024, Renewable Energy and Clean Technology was a strong investment theme and companies associated with the theme witnessed strong gains. 

Stocks of Suzlon, Inox Winds, NHPC, Waree Renewables, SJVN, went on to become multibagger stocks in 2024. 

Similarly, EV and charging infrastructure, AI and machine learning, Healthcare and biotech innovations, digital transformation and SaaS are the emerging global trends and stocks associated with these trends are witnessing strong investor attraction. 

Investments in potential multibagger stocks of 2025 requires long term patience that may often take years to deliver exponential returns. 

Also, diversification is important. Don’t put all your money in one stock, even if it seems promising. Choosing the right multibagger stocks can significantly impact your wealth creation in 2025 and beyond. 

Also Read: Penny Stocks | Top Gainers | Top Losers

FAQs on Multibagger Stocks

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