Model Portfolio Explained: Model portfolios are emerging as a popular investment option among retail investors seeking structured and curated equity exposure, but experts caution that they may not be suitable for first-time investors without adequate market understanding.
What is a model portfolio?
Explaining the concept in a discussion on Zee Business, Kshitiz Mahajan, Managing Partner & CEO of Complete Circle Wealth, said a model portfolio is essentially a curated investment structure where stocks are selected, distributed, and executed in a systematic manner.
“There are different investment vehicles today—mutual funds, PMS, direct stocks, and newer structures like smallcases and model portfolios. A model portfolio is a curated basket, often theme-based such as mid-cap, small-cap, defence, energy or manufacturing,” Mahajan said.
He added that unlike mutual funds, where investors receive units based on net asset value (NAV), model portfolios involve direct ownership of stocks in the investor’s demat account. “When you subscribe, the execution happens in your demat account, and rebalancing updates are shared with investors,” he noted.
Mahajan further highlighted that ticket sizes make model portfolios more accessible compared to Portfolio Management Services (PMS), which typically require a minimum investment of Rs 50 lakh. “Model portfolios or smallcases can start from Rs 1 lakh or even Rs 5 lakh depending on the structure,” he said.
Who are model portfolios for?
Certified Financial Planner Poonam Rungta said model portfolios are not restricted to a specific investor category and can be accessed by anyone, but suitability depends on risk awareness.
“Model portfolios are not meant for one specific type of investor. Anyone can invest, but the structure must align with your financial goals and risk appetite,” Rungta said.
She added that younger investors are increasingly adopting such products due to their digital-first nature and ease of access. However, she cautioned that equity risks remain inherent. “The benefit comes from long-term discipline and compounding, but investors must understand volatility and stay invested,” she said.
Transparency vs tax implications
Experts noted that model portfolios offer higher transparency compared to mutual funds, as underlying stock holdings are visible in the investor’s demat account. However, they also come with tax implications during rebalancing.
“Whenever rebalancing happens, capital gains tax may apply because stocks are directly held by investors. This is a key factor to consider,” Rungta explained.
She also pointed out that frequent rebalancing could lead to repeated tax events, even though the cost structure may be lower compared to traditional fund management products.
Should beginners use model portfolios?
Despite growing popularity, experts advised against model portfolios for beginners.
“Personally, I would not recommend model portfolios for first-time investors,” Rangta said. “It is like sitting in a plane as a co-pilot—you need basic understanding of markets, volatility, and risk. Without that, investors may panic during market fluctuations and make poor decisions.”
She suggested that beginners should ideally start with mutual funds before moving to more complex equity strategies.
Diversification and rebalancing remain key
Mahajan stressed the importance of diversification and disciplined allocation across asset classes.
“Do not put all your eggs in one basket. A balanced approach works best—mutual funds for core allocation, index funds or ETFs for low-cost exposure, and a small portion, say 5–10 per cent, in model portfolios,” he said.
He added that investors should review portfolios periodically. “A review every six months is important to ensure alignment with financial goals and sectoral trends such as defence or data infrastructure,” Mahajan said.
Additionally, Rungta said, “Rebalancing is essential. Without it, your asset allocation can drift away from your target. Diversification helps reduce emotional investing and FOMO (fear of missing out on sectors like gold, pharma, or defence).”
A common ideal allocation is 60:40 between equity and debt, but it depends on age and risk profile. At least once a year, investors should rebalance their portfolios, she added.
Mutual Funds vs Model Portfolios
Comparing the two structures, Mahajan said mutual funds remain more passive for investors, while model portfolios require greater involvement.
“Mutual funds are pooled investments managed by fund managers, whereas model portfolios involve direct stock ownership and require investors to be more engaged,” he said.
He added that model portfolios are still an evolving concept and should be viewed as a complementary investment product rather than a complete replacement for mutual funds.
How to start investing in model portfolios?
Experts advised investors to carefully evaluate portfolio managers before investing.
“Look at the track record, experience, and strategy of the portfolio manager. Do not rely solely on past returns,” Mahajan said.
He also cautioned against comparing different categories. “Do not compare small-cap model portfolios with flexi-cap mutual funds—they are different strategies altogether,” he added.
Mahajan concluded that investors should start small, observe performance over one to two years, and gradually increase allocation if comfortable.
(Disclaimer: This article is only for educational purposes, not investment advice. Do your own due diligence or consult an expert for financial planning.)
