How SIP portfolio is different from other three Risk Profile based Model Portfolios?

To put simply, SIP Model Portfolio is a further augmentation of Yadnya’s existing risk profile-based model portfolio with more focus on stocks by utilizing advanced investment strategies and an additional objective to leverage proven SIP philosophy of investing in mutual funds and applying this to investing in stocks.

Let’s see what are the similarities and differences between the two types of model portfolios?

Similarities

Both SIP Model Portfolio and the stocks sub-portfolio of the Risk Profile based Model Portfolios (Conservative, Moderate and Growth) are constructed primarily keeping in mind the India Consumption theme i.e. focusing on companies that are into consumer centric businesses like Consumer non-discretionary, consumer discretionary and financial businesses fueling this consumption.

The selection universe for both is BSE 500 with similar screening criteria of not considering illiquid stocks, avoiding companies with shares pledged as collateral for debt and excluding state owned enterprises called public sector undertaking (PSU).  All the stocks are bottom-up analyzed for low downside risk based on their business, industry scope, current valuations, financial ratios, competitive landscaping, business correlation with economic indicators, company’s corporate governance and management. As part of model portfolios, investors also get company level in-depth fundamental analysis videos of the constituent stocks.

Differences

Asset Class Diversification - The risk profile-based Model Portfolios are multi-asset class which means that they include stocks or funds from multiple asset classes including Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Fund, Index Funds, Money Market Funds and Direct Stocks. There is a first level Strategic Asset Allocation done at the Asset Class Level followed by a second level Tactical Sectoral Allocation for each of the three variants – Conservative, Moderate and Growth. This gives risk profile-based model portfolios asset class level diversification along with sector diversification while SIP Portfolio is a pure stock portfolio and diversification is achieved via tactical sectoral allocation.

Minimum Investment Amount – The minimum investable amount for Risk Profile based model portfolios depending on the stock price movements is between INR 60,000 to INR 400,000, while for SIP Model Portfolios is typically below INR 25,000.

Investor Knowledge about Capital Markets – For risk profile-based model portfolios, depending on the risk profile, level of financial knowledge required, varies from Beginner level (Conservative Model Portfolios) to Intermediate Level (Moderate and Growth Model Portfolio) as these are more holistic and diversified portfolios. However, if we look at the SIP model portfolios, is it important that investors have intermediate to advanced level knowledge of stock markets. The reason is that in risk profile based portfolios there is allocation done across asset classes including fixed income, equity and cash equivalents but for SIP model portfolio, since it is a stock only portfolio investors need to be more aware of the mechanics of the capital markets to understand what are they getting into.

Weighting scheme - In risk profile-based portfolios, after Strategic Asset Allocation by asset class and Tactical Asset Allocation by sector, in stock sub -portfolio, stocks that are part of the same sector are given weights as per bottom up analysis. In the case of SIP portfolio, the methodology of fundamental weighting scheme is utilized, wherein the weights are decided looking at the fundamental factors like historical returns, PE ratio, etc.

Stock Screening criteria – As mentioned in the similarities there is a good overlap in the screening criteria that we apply for both risk profile-based model portfolios and SIP model portfolio like liquidity, shares pledging, etc. but stock price is an additional criteria that was applied for SIP model portfolio. Given that one of the objectives is to do SIPs between INR 20,000 to 25,000, high price stocks like MRF, Honeywell Automation, etc. have been screened out.