Modern Portfolio Theory (MPT): A Smart Investment Approach for Unlisted Shares

Introduction

Investing in financial markets requires a balance between risk and return. Whether you are buying or selling unlisted shares, applying Modern Portfolio Theory (MPT) can help optimize investments while minimizing risks through diversification. Investors who understand MPT can make better decisions when dealing with unlisted shares, ensuring a well-structured and profitable portfolio.

In this blog, we will explore MPT, how it applies to unlisted shares, and how you can use it to enhance your investment strategy.

What is Modern Portfolio Theory (MPT)?

Modern Portfolio Theory (MPT) was developed by economist Harry Markowitz in 1952. It is an investment strategy that focuses on diversification to maximize returns while minimizing risk. The fundamental idea is that investors should not look at individual assets in isolation but should consider how they interact within a broader portfolio.

Key Principles of MPT:

1. Diversification – Spreading investments across different assets reduces risk.

2. Risk-Return Tradeoff – Higher returns are associated with higher risks.

3. Efficient Frontier – The optimal portfolio offers the highest return for a given level of risk.

4. Asset Correlation – Including assets with low or negative correlation minimizes portfolio volatility.

Applying MPT to Unlisted Shares

Investing in unlisted shares can be lucrative but also comes with significant risks. Since these shares lack liquidity and can be volatile, MPT principles can help investors create a balanced and optimized portfolio.

1. Diversification with Unlisted Shares

Diversification is crucial when investing in unlisted shares. Rather than putting all funds into a single company, investors should spread their capital across multiple sectors and asset classes.

Example:

• Instead of investing solely in tech-based unlisted shares, consider healthcare, manufacturing, and fintech sectors.

2. Balancing Risk and Return

Before buying or selling unlisted shares, investors should assess their risk appetite. Some pre-IPO companies offer high returns, but they also carry higher risks due to market uncertainties.

Example:

• Investing in an early-stage startup carries high risk but may yield significant returns upon IPO.

• Established private companies may offer moderate but stable returns.

3. Liquidity Considerations in Selling Unlisted Shares

One major challenge with unlisted shares is liquidity. Unlike publicly traded stocks, selling unlisted shares requires finding buyers in the private market. To manage this, investors should balance liquid and illiquid assets in their portfolios.

Example: 

• Holding mutual funds or ETFs alongside unlisted shares can improve liquidity.

4. Reducing Portfolio Volatility

MPT suggests including low-correlation assets to stabilize portfolio performance. Investors should combine high-growth assets with defensive ones.

Example:

• If tech stocks face a downturn, having unlisted shares in consumer goods or pharma companies can help mitigate losses.

Benefits of Using MPT for Unlisted Shares

Reduces Investment Risk – Diversification helps manage potential losses. ✔ Maximizes Potential Returns – A well-balanced portfolio optimizes growth. ✔ Improves Liquidity Management – Ensuring a mix of liquid and illiquid assets enhances financial flexibility. ✔ Creates a Data-Driven Investment Strategy – MPT is based on financial models, not speculation.

How to Apply MPT When Buying and Selling Unlisted Shares

1. Assess Risk Tolerance – Determine how much risk you can handle.

2. Diversify Your Portfolio – Avoid over-concentration in one sector.

3. Monitor Market Trends – Stay informed about IPOs and industry performance.

4. Consult Financial Experts – Seek professional advice for an optimized portfolio.

Final Thoughts

Applying Modern Portfolio Theory to buying and selling unlisted shares allows investors to maximize returns while effectively managing risk. By diversifying across industries, balancing risk levels, and optimizing liquidity, investors can make more informed and strategic decisions.

Explore Unlisted Shares with Expert Guidance!

At InCred Money, we help investors access high-potential unlisted shares, ensuring smart investment strategies with MPT principles.

🔹 Buy Unlisted Shares before they go public.
🔹 Sell Unlisted Shares at competitive market prices.
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Sources:

1. Harry Markowitz – Portfolio Selection Theory (1952)

2. Economic Times – Understanding Diversification Strategies

3. Money Control – Investing in Unlisted Shares