Lack of planning
He had not planned anything specifically on finances and has largely been able to meet all requirements based on the earnings. He has done some FDs, taken some insurance policies, has done some MF investments of late as some colleagues had suggested. Apart from this, he had EPF & PPF.
Ram is largely oblivious to the idea of planning finances. He had met a financial advisor recommended to him by a friend and for the first time started thinking about planning the finances. At 41, he has a couple of important goals like retirement and his children’s higher education which he considers are important. Fortunately for him, he has over ten years for children’s higher education and about several more to retire.
He has been advised to invest in mutual funds for these two goals. Since he has no exposure to equity assets, he would need to start investments in equity oriented MF schemes.
Planning for the goals
Both a child’s education and retirement are important goals. These are goals that one cannot postpone ( unlike buying a home/ car or going for a holiday ) in that, the timing of the goal is hard coded. Hence, there is no margin for error when planning for such important goals.
When investing for such goals, one needs to consider the risk profile of the investor, their personal situation and where in the life cycle they are, time horizon, number of working years, liquidity needs, taxation etc. Hence the portfolios for investors would vary based on their unique situation and would have to be carefully put together, which will reflect in the allocation of various asset classes in the portfolio. A good financial advisor would be able to take these into account and suggest the right asset allocation mix.
Arriving at the right asset mix
Let us say that Ram is a moderately aggressive investor based on his risk profile. He has the risk capacity too considering the good and stable income stream as well as the considerable number of years he is expected to work. Since Ram gets a salary, the way he can invest is going to be on a monthly basis, primarily. Also, he receives bonus, ex-gratia and incentives. He could invest a bulk of that too when he gets that.
The right asset mix has to be arrived at based on his specific situation. It would appear that an allocation of about 55% in equity assets would be right for him.
Since he has invested only in debt-oriented assets till date, it is important to allocate most of the future flows into equity apart from reallocating some money away from debt oriented investments.
MF investments in Equity funds
He could consider good passive funds like index funds based on Nifty 50 and Nifty 500. The former will help him invest in the top 50 stocks in the listed equity space, in the same proportion as the index. The latter would allow all-market exposure to the listed universe of stocks, which would be predominantly large-cap ( over 78% ) on a value wise allocation basis. There will also be about 18% mid-cap and 4% small-cap exposure, which can potentially offer a kicker to the returns, over the long-term.
Apart from this, he could allocate in flexi cap funds where the fund manager has the mandate to invest across market capitalisations. This will be a wonderful category to invest as the fund manager would go wherever the opportunities lie. Hence, when investing in such a fund, one would participate in the markets, as per what is best at that point.
The other category to consider is international funds. We need diversification across geographies, currencies, economies, unique sectors & constituents in other markets ( like robotics, AI, Social media firms, aerospace etc. ) and also as per the goals, where there may be money requirements in other currencies in those foreign countries.
Such international allocation is a strategic allocation and should not be brought down based just on poor returns at a certain point in time (like the current point). Every investment goes through cycles and one will have to stay invested to enjoy the positive upcycle.
Other categories like thematic or sectoral investments should be part of one’s satellite portfolio and may be considered if warranted.
Investing in Gold
The other investment one may consider is in gold. If one has the time horizon of eight years, Sovereign Gold Bonds is probably the best way to invest in Gold as the maturity is tax free and the investor also gets 2.5% return every year, on the investment. However, there are liquidity constraints and tenure requirements due to which a simple Gold fund or Gold ETF may be the product to consider. Gold investments through bullion would not be a great way to invest due to purity, storage, insurance, major difference in costs with pure gold prices etc. Gold investment should be to the tune of 5-10% of the portfolio.
Important to note
What is important, however, is that Ram should be disciplined and regular with his investing and can bring up the equity component to about 55% in the short to medium term. He should review the portfolio once every six months and make any changes. Ram may need to take the help of a professional in this regard. Changes in the asset allocation can be made along the way as needed.
Since Ram is just 41, he would be able to accumulate a very good corpus over time. He should however have the patience and persistence to keep investing for the long-term without getting spooked by volatility & market noise.
(Suresh Sadagopan is the MD & Principal Officer, Ladder7 Wealth Planners and author of If God was your Financial Planner)
