A defined portfolio is a type of investment strategy that involves the use of an investment trust to determine which assets will be secured and held in the portfolio. Typically, this process involves presenting the investor with a predefined portfolio that includes specific investments, often all of the same general type. Other than other portfolio strategies in which the investor is free to sell off individual assets in favor of buying others, a defined portfolio is purchased and sold as a single unit. It is not unusual for the portfolio to only remain in place for a fixed period of time, then be liquidated and the proceeds forwarded to the investor.
The structuring process of a defined portfolio often calls for working with an investor to select specific securities for the trust on the front end. This means that during the early stages, the investor has the chance to select from a pre-approved listing of holdings in order to build the portfolio to his or her liking. Once that selection phase is complete, the investor may not change the securities included. Some change may occur over the life of the defined portfolio, as certain assets are called early or mature before the time limit set for the liquidation of the collection of investments.
It is possible to put together a defined portfolio involving either a single type of investments or in some cases a mixture of different investment types. This means that one investor may prefer to go with a predefined portfolio of stocks only, while a different investor may go with a predefined portfolio of bonds. Some strategies allow investors to include a mixture of stocks, bonds, and mutual funds in the combination, a benefit that helps to add some diversity which can help protect the investor if certain types of investments begin to lose value in the marketplace.
While the investor cannot change the securities held in a defined portfolio, it is possible to sell the portfolio as a whole to another investor. Typically, that buyer does not have the option of renegotiating the holdings found in the trust but must accept the current configuration. An investor may choose to sell off a defined portfolio when there is a need to raise money quickly to meet an emergency or even if there is a desire to focus on other types of investment strategies. Selling the portfolio should only be done after considering the tax ramifications of the sale, since there is a good chance that at least some of the returns will have to go to settle tax obligations.
