How is an investment portfolio constructed? Part 1

All financial institutions, in one way or another, are intermediaries between those who have financial resources and those who require financial resources. A bank is nothing more than an intermediary between the one who has money and seeks to save it, and the one who needs those savings to put it to work in his business or enterprise. The happy result of this intermediation will be a saver receiving a return that comes from the cost paid by the borrower for the use of the money.

Investment institutions are no different, they receive money from the contributor or investor, and place it in companies or investments that generate an adequate return, which rewards the risk and patience of the investor. And depending on the investor's objectives, there are different types of institutions or investment funds. Thus, those who seek to save for a decent and lasting retirement invest in pension funds. Those seeking less distant returns engage with growth mutual funds. And so on.

On the other side of the coin, the funds that receive this money from the public must have plans and strategies for how and where to invest this money. A large part of this decision depends on the objectives sought by the savers themselves in that fund. 

So to begin with, the construction of an investment portfolio depends on the fund's objectives. An investment portfolio designed for a pension fund will be very different than one designed for an aggressive growth fund. And the differences are not necessarily in the asset classes invested in. Let me explain myself better.

A pension fund is normally a long-term investment vehicle with an emphasis on secure growth. But at the same time, they are funds where assets have to be regularly liquidated to cover the pensions of those who retire from the fund. A sovereign wealth fund, such as the Panama Savings Fund, is a fund whose objective is to provide the country with a safety cushion in case of eventualities or disasters. Thus, the philosophy of the fund is to preserve the invested capital, but with a safe return. This type of fund does not have periodic disbursements like a pension fund, but rather has inflows. Other types of funds have other investment objectives and other liquidity profiles. And their investment policy will be designed according to their characteristics.