The right mix of asset classes for young investors
Many young people are lost when it comes to investing. The main reason is that they often don’t know the right mix of asset classes or investment products. To create a portfolio that will grow and meet various financial needs, we need to allocate capital to a variety of assets, which can be broadly classified into equity, debt, real estate, and alternative instruments.
For equity investments, the rate of return depends on the company’s profits, and for debt investments it is fixed. For example, real estate has characteristics of both equity and debt, where monthly rent payments act as interest payment streams and real estate appreciation is like stocks or equity. clean. This means that real estate is a hybrid investment.
Plus, real estate is a necessity, so there is also the utilitarian aspect of it. There are other investments such as commodities, cryptos, some venture capital and hedge fund investments, the returns of which are not tied to equity or debt, and can be classified as alternative investments.
Getting the right proportions
Young people should focus more on investing in stocks such as stocks, stocks, mutual funds and even real estate. Even though the risk is higher compared to other asset classes, the possibilities for growth and profits are also high. On the other hand, debt investments such as bonds, debentures, and savings accounts have lower risk and reward investors with lower returns.
Young people can afford to focus less on these early in their careers because they have fewer financial commitments to fulfill. They should gradually increase their investments in debt as they age to create secured assets for themselves. The proportion of both debt investments and equity assets should better meet your financial needs and goals and depends on factors such as time period, liquidity and the ability to take risks.
Let’s take a look at three people and their investment portfolios to better understand this: How did Ramesh end up with almost 3 crore more? Ramesh, Sanjana and Riya started their journey by investing in stocks and debt securities in different proportions at the age of 20. If they decide to retire at age 60, here is their retirement portfolio:
As the table shows, a simple shift in one’s portfolio to 80% equity can lead to almost 2.7 crore in additional wealth upon retirement. Ramesh, who had invested 80% in equity, will end up with a corpus of 3.3 crore, against a meager 59.5 lakh for Riya. Thus, a young investor making the right mix of investments can reap enormous financial benefits and freedoms.
Investments must be made in various sectors and locations. The size of the capital of companies must be large enough to mitigate the potential risk of collapse of the sector. Diversifying your investments helps you increase your risk appetite and reduces the chances of a total downfall. For example, stocks typically outperform bonds when a company is doing well.
But, when the going takes another direction, stocks fall, but bonds remain strong. Thus, by holding both bonds and stocks, you reduce the risk of your portfolio. However, do not think that diversification only concerns securitized investments.
â¢ Gold: Gold, although traditional, is one of the most essential investments. It has the power to adapt to changes in inflation as the value increases with the increase in the cost of living. In the short term, the price of gold always seems fluctuating and uncertain, but it guarantees a safe return in the long term. Almost 5% of the portfolio can be considered a reasonable allocation to this asset class.
â¢ Merchandise: Another unique option for diversifying your investments is investing in commodities. It is about investing in metals, agricultural products, energy resources and livestock. Direct investments, commodity stocks, futures, exchange-traded funds (ETFs), and mutual funds are the different options.
â¢ Cryptocurrency and NFT: Cryptocurrencies, like bitcoins, are proving to be the most popular investment choice for young people around the world. While recent cryptocurrency regulations have dampened enthusiasm in Indian markets, this is a space to watch when regulatory restrictions ease. You can consider investing one to two percent of your portfolio in crypto or NFT.
The allocation of assets to different investment classes cannot only be based on profitable earnings, but it should include different aspects, such as financial goals, risk tolerance, company portfolios, etc. Passive investing would be a suitable option for those who wish to invest and let it grow automatically without much supervision. In this method, investors have a low profile because their limited investments are based on an index which provides less oversight.
On the contrary, active trading is suitable for those who wish to invest actively and keep abreast of market fluctuations. You have to pay close attention to price fluctuations and other external factors to buy and sell investments at the right time. Selecting the right asset classes is essential for young investors to create a sustainable portfolio suited to their changing life goals and to enjoy a financial stress-free retirement.
(The author is a Chartered Financial Analyst (CFA) with over 15 years of experience in the asset management industry. He currently runs his own Chennai-based consulting firm.)