Plan, allocate and invest
There are no hot tips to guarantee good returns in a short while, say experts. The trick is to plan well and do proper asset allocation
MUMBAI: Amidst the card games and house parties with friends and family during Diwali celebrations, there is invariably a conversation about money and investment. The most common questions usually asked are—any tips on the next big stock buy, where to buy a house to get double the returns or is gold worth buying now? The truth is there are no hot tips that can guarantee you quick money. What you need is a plan that can help you build a corpus for all your financial goals. Here is how:
KNOW ABOUT ASSET ALLOCATION
Do you have a fixed deposit, a house, a mutual fund or gold? If you have more than one of these things, you are already doing asset allocation. According to Sanctum Wealth, asset allocation is the time-tested means of reducing volatility and an effective asset allocation portfolio generates higher optimised portfolio returns than any single underlying asset class. “Asset allocation is meant to be all assets—physical assets such as real estate and gold and financial assets such as equity and debt. However, ideally one excludes the house one is staying in,” said Anil Rego, a Bangalore-based financial planner.
Assets can be in different forms. For instance, you may have gold in the form of jewellery, coins, gold exchange traded funds, gold mutual funds or sovereign gold bonds. In case of equity, it could be in the form of direct stocks, equity-oriented mutual funds or even international funds. “Fundamentally, financial goals decide the asset mix. But for someone in HNI or retirement phase, we arrive at an asset mix ratio before we start wealth distribution phase,” said Amit Kukreja, founder, Wealthbeing Advisors. Broadly, asset allocation is simply to decide how much money you should put in various baskets. For a balanced portfolio, you need to have a good mix of different asset classes. With regular rebalancing, returns can be further enhanced.
IMPORTANCE OF DIVERSIFICATION
Don’t put all your eggs in one basket. Putting all your money in one asset can create a problem. “Assume you put all your money in real estate. Real estate has its own cycle. It is also illiquid. Hence, you may realise that at the time you need your money, you may not be able to get your hands on it,” said Shyam Sunder, managing director, Peakalpha Investment Services Pvt. Ltd. While deciding where to invest, you need to look at four things: returns, risk, tax and liquidity. “Unfortunately a lot of people only look at returns. However, risk, tax and liquidity are equally important,”
said Sundar. An example of factoring in tax would be looking at fixed deposit and debt fund. “Both instruments are relatively safer. However, debt funds are more attractive than FDS from a post-tax returns perspective,” said Sunder.
Another way of looking at asset allocation would be based on time horizon. “You can consider liquid funds and money market funds for short term; bonds for medium term and equity, commodities, real estate, international assets and alternative assets for longterm needs. The long term portfolio allocations would be a function of risk profile, correlation as well future outlook,” said Amit Trivedi, a Mumbaibased financial trainer. You need proper balance of liquid and illiquid assets.
WHAT YOU SHOULD DO
Ideally, you should have a financial planner or a financial advisor to help you. However, if you don’t have a planner, you can use thumb rule with caveats. “If you have access to a good advisor, thumb rule should be discarded for a more scientific analysis. A classic thumb rule often used for equity allocation in your portfolio is 100 minus age. Hence, for a 30-year-old, as a thumb rule, you can have 70% of your money in equity,” said Sunder. Broadly, equity in your portfolio comes down with age. “This is a thumb rule only and ideally, weightages should be based on risk profile and conducting a financial planning to be accurate,” said Rego.
In case of gold, a thumb rule is not to have more than 5-10% of your overall money in it. “You can consider gold to account for around 5% of your overall investment, largely for diversification and inflation hedge,’ said Deepali Sen, founder partner, Srujan Financial Advisers LLP. If you already have a house, there is no need to invest more in real estate, she said. “If you have a house to stay we don’t insist on buying a property for diversification because it may skew your portfolio heavily towards real estate as an asset class, would need a loan, sucks away cash flows of next 20-25 years, is indivisible and illiquid,” said Sen. If you get the asset allocation right, you will never look for hot tips again.