India is passing through a very interesting phase of consistent economic development and the outlook for years ahead remain extremely optimistic. All experts, foreign as well as local, share a common view that next decade (2006-2015) belongs to India.
Large Indian corporates are spreading their wings in far corners of the world, mid-size corporates are consistently unlocking their value and potential and many young entrepreneurs are on the threshold of launching successful businesses to make a mark for themselves. In this frenzy of robust economic activity, great opportunities await the Indian investors both large as well as small, existing as well as uninitiated, bold as well as shy and timid. It’s time to get ‘on board’ or else you may miss the the ‘bus’.
Asset Allocation: The ‘key’ lies in optimum ‘asset allocation'. Broadly speaking, there are six basic asset classes through which a portfolio can be built to create ‘long-term’ wealth as well as to meet ‘short-term’ and ‘mid-term’ financial objectives. These are Debt, Equity, Real Estate, Gold, Commodity and Art.
You can analyze your existing portfolio and find out the current allocation expressed in terms of percentage in each of the above six asset classes. Having done that, you should consult your financial planner or investment advisor to decide about the optimum asset allocation for yourself and then make necessary adjustments to convert your portfolio into an ‘Ideal’ one. While reviewing your existing portfolio, you should not include your house property in which you live as a part of ‘Real Estate'. Similarly, gold ornaments being regularly used by family members should not be included in the category of ‘Gold'.
Recommendation for HNIs: In ‘Investment Advisory’ terminology, a term which is commonly used to denote ‘rich’ person is ‘HNI’ or a ‘High Net-worth Individual'. Usually, a person with an asset base of over Rs.5 crores (US$1 million) is described as an ‘HNI'. Ideal asset allocation for a HNI having moderate risk appetite may be:
| a. Debt |
15% |
| b.Equity |
40% |
| c. Real Estate |
20% |
| d. Gold |
5% |
| e. Commodities |
10% |
| f. Art |
10% |
Accordingly, if current portfolio of a HNI is Rs.5 crores, it should be split as follows:
| i. Debt |
Rs.75 lacs |
| ii. Equity |
Rs.2 crores |
| iii. Real Estate |
Rs.1 crore |
| iv. Gold |
Rs.25 lacs |
| v. Commodities |
Rs.50 lacs |
| vi. Art |
Rs.50 lacs |
Now one should compare the existing allocation and realign the same to bring it closer to the ideal one. In order to reap the benefits of growing economy, it is vital that we are present in each asset class and with proper weight attached to it. Over the years continuous wealth creation is the only proven ‘mantra’ for comfortable life and consistent rise in standard of living.
Recommendation for all & sundry: Asset allocation is equally important for young persons who are starting their career and have ‘nil’ portfolio as of now. All individuals share two common goals, namely, ‘Creation of Wealth’ and ‘Protecting the Same'. It is common knowledge that wealth is created through investments and it is protected through insurance. Common man often gets confused with ‘scheme selection’ or ‘choosing the product’ because of a large variety of investment products as well as insurance plans. At times, this confusion is further compounded by certain ‘product salesmen’ who in the garb of ‘experts’ try to push their own agenda, i.e., the product of which they are the agents.
Here, we are sharing some common factors to be kept in mind while deciding on your portfolio strategy as well as on ensuring that you are adequately protected through right kind of ‘insurance covers'.
- Stop confusing ‘Saving’ with ‘Investing'. It is wrong to say that you have invested your funds in bank ‘Fixed Deposit’ or in ‘Post Office Monthly Scheme'. Actually you have ‘saved’ your money in these deposits and not ‘invested’ the same. There can not be any investment decision without an element of risk. And without ‘risk’ wealth cannot be created.
- Whenever you compute your ‘returns’ from investment, make adjustments for ‘inflation’ as well as for ‘tax'. For example, if you are in 30 per cent tax bracket and current inflation rate is 5 per cent, in that case, your ‘savings’ in one year bank FD yielding 6 per cent p.a. will give you a net negative return of minus 0.8 per cent p.a. Your post tax return is only 4.2 per cent and if we adjust inflation, you are actually depleting our hard earned wealth by 0.8 per cent p.a. On the other hand, if you have invested our funds in a carefully selected diversified equity fund, yielding say 15 per cent per annum, your net return will be 10 per cent (after adjusting inflation) assuming long-term capital gain continues to remain exempt as it is now.
- While constructing our debt portfolio, we must diversify our funds in a variety of instruments, like liquid funds (for ensuring liquidity and tax-free returns), Public Provident Fund (for tax saving as well as for tax-free returns and for comfortable retirement planning), Post Office Monthly Scheme (for meeting our monthly needs and for safety of principal and added attraction of 10 per cent bonus on maturity at the end of 6 years), Fixed Maturity Plans (FMP) (for higher tax-free returns with safety of principal), short-term and long-term floater schemes (for tax-free dividends as well as for protection against volatility of interest rates) and Savings Bank Account (for immediate liquidity).
- While constructing equity portfolio one should resist the temptation of investing in direct stocks as it is a full time job to track individual companies and their performance. Rather one should build a portfolio through a mixture of carefully selected diversified equity mutual funds including ELSS plans. One should further diversify into large cap, mid cap and small cap schemes. Similarly, one should also divide one’s funds amongst various fund managers (also known as AMCs). Preferably, you should not invest more than 10 per cent of your equity portfolio in one scheme or more than 20 per cent of your equity portfolio in one mutual fund (or an AMC).Sector specific funds should be avoided or maximum allocation can be 5 per cent to one sector.
- Systematic Investment Plan or SIP is most ‘preferred’ and ‘time tested’ tool to ride the volatility of fluctuating markets. Time and again SIP investments have provided superior returns as compared to ‘one time’ investments.
- Funds equivalent to ‘two’ times of your monthly household expenses should be kept highly liquid, i.e., either in ‘cash’ or in ‘savings bank account’ or in a ‘liquid scheme’ of a mutual fund.
- Unit Linked Insurance Plans (popularly known as ULIPs) also must form part of your portfolio, as these plans ensure ‘disciplined savings’ and provide essential protection through ‘risk cover’ besides accumulating market linked returns.
- While investing in equity, it is futile to try to ‘time’ the market. Instead you should regularly invest without getting affected by the short-term fluctuations in the market.
- Investment in ‘arts’ is very fascinating concept. You need to have an ‘eye’ for visual aesthetics and a ‘genuine’ interest in modern and contemporary art in order to build a suitable portfolio. Regular visits to prominent art galleries and consulting some established art evaluators may be of help if you are a ‘novice’ so far. Amazing wealth has been created by connoisseurs of serious art.
- Commodity exchanges are being established in our country. Consult your financial planner for his expert views on how to invest in commodities to get benefits of movements in commodities market.
- Investment in real estate is not an easy decision. A lot of research is required before you venture into it. Real estate prices are shooting up in various upcoming suburban localities throughout India. Again you need help from experts to build a portfolio around real estate. Mutual funds are expected to launch ‘real estate funds’ as well as ‘commodities fund’ and ‘gold funds’ and then it will be convenient for Indian investors to construct a healthy portfolio with suitable ingredients.
- Instead of scheme-centric approach, you should have ‘financial planning’ approach. This essentially leads to careful analysis of your current worth, immediate and long-term financial objectives, life goals and your risk taking capacity. Having analyzed all these, you may find it easy to select products and schemes which fit into your personal financial plan.
Our country is entering into an exciting era of hope and prosperity, optimism and success. And as a result it becomes imperative for all citizens to join the ‘party’. Or else, you will repent later.
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