Mumukshu Desai, Director Artham FinoMetry
A very popular and frequently cited study of American pension plan managers, conducted in the 1980s, suggested that asset allocation is the key factor (91.50%) that decides the returns you will get from money. your entire investment portfolio. The reason most of us don’t identify with this or agree with it is because in India we like to analyze all of our investments and how they are performing separately.
For example, a typical Indian investor knows he has an “X amount” in FDs and bonds that give 5% to 6% safe returns, the “Y amount” in real estate, which has doubled over the course of the year. of the past 10 years, and “the Z amount” “in mutual funds or stocks that are currently showing returns of over 15%. At first glance, it looks like a very decent wallet. Although real estate investing has doubled in 10 years, it only translates into annualized returns of 6.95%. And while the majority of this family’s portfolio (say 90%) is invested in DFs, bonds, and real estate, they haven’t had any decent returns in the past 10 years, despite the fact that their portfolio of stocks show returns of more than 15% during this period. So, asset allocation becomes one of the most important and inevitable aspects that you need to do to improve your financial well-being.
There are primarily four “Assets” where we Indians invest. Debt, equity, real estate and gold. Asset allocation is nothing more than a critical decision to invest a certain percentage of your total investments in each of these four assets. To arrive at the right percentages for each one, it is necessary to know the basic behavior and the return profile of each of these four assets.
Debt gives fixed returns for a fixed term of your choosing. While the returns are lower, it’s the predictability of income streams that makes it one of the most sought-after assets in the world. Lifelong income requirements and short term investment milestones can be planned with leveraged investments. Debt is basically for the preservation of wealth. Equity is an asset for the creation of wealth. It is volatile in nature and can give unpredictable portfolio returns over the first 3-5 years. But once the investment base is established, the overall volatility at the portfolio level decreases dramatically in your equity investments. It is always said that equity investments should be held for a long term horizon of 5 years and more. Real estate is an essential part of any investment portfolio and can be viewed as a wealth building asset. In addition, it can give regular rental income. In addition, it is a âphysical assetâ that an investor can see, touch or even use. Gold is another very popular âphysical assetâ. Gold prices are volatile in the short term, but generally stay northward in the long term. Interestingly, gold prices are known as a perfect hedge (protection) against inflation. In addition, since they are quoted in US dollars, the upward movement of the US dollar benefits gold prices in Indian terms.
How then can we execute the asset allocation? For an answer, ask yourself three simple questions. (1) How much of your investment can you save for wealth building for the next 5+ years? (2) Do you need regular income from these investments? And (3) How much volatility can you take in your portfolio in the short term, i.e. in the next 3 to 5 years? Once you know the answers to these questions, the next step is to prepare your own financial milestone sheet. Some examples of financial milestones are, the cost of raising children, the post-retirement fund, the body for a future start-up business, the down payment for a first or second home, and regular income from investments. Once these milestones are ready, the asset allocation decision becomes quick and easy for you!
Once your asset allocation is ready, it is very important to stick to it and rebalance it periodically, preferably every year. Let’s say your asset allocation is 50% equity, 35% debt, and 15% gold and stocks perform better than others in any given year, automatically its allocation will increase. So reduce the allocation of stocks and add it to debt and gold for rebalancing.
Opinions are personal: the author is Mumukshu Desai, Director Artham FinoMetry Private Limited, Ahmedabad
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