1. Want a secure future? Here’s how to plan your investments

Want a secure future? Here’s how to plan your investments

All of us work hard to earn money. We want to save, invest and make our wealth grow. We want to become financially secure. This requires investment planning, which is a technique that all of us can acquire.

Published: May 10, 2017 12:53 PM
The ability of a person to take risk is important. Risk appetite depends on several factors like age, income level, expenditure commitments etc.

By V K Vijayakumar

All of us work hard to earn money. We want to save, invest and make our wealth grow. We want to become financially secure. This requires investment planning, which is a technique that all of us can acquire.

A major contradiction in human economic behaviour is that most people are very careful while spending even small amount of money, but totally careless while investing big money. We spend a few minutes for buying a kilo gram of fruits for Rs 50, carefully picking and choosing each fruit. But, when it comes to investing Rs 50000, many are careless. There are numerous instances of even highly educated people making reckless investments and losing their hard earned money. To make our wealth grow and to secure our future, it is important that we plan and invest money wisely.

Essentials of investment planning

The essentials of investment planning can be summarised as follows:

1. Set your financial goals
Normally, people have goals such as acquiring a house, buying things like vehicles, marriage, supporting family, children’s education/ marriage, retirement planning and finally bequeathing one’s wealth.

2. Decide on the time-frame to achieve these goals
It is important to decide the time-frame for achieving different goals. For example, when to acquire a house, when to buy a car, when to fund the education of children etc.

3. Assess your risk appetite
The ability of a person to take risk is important. Risk appetite depends on several factors like age, income level, expenditure commitments etc.

4. Allocate your investible funds based on your risk profile
Invest more in high growth assets like stocks/ equity mutual funds (risky in the short run but not in the long run) in the early phase of your career when risk appetite is high and less in stocks and more in fixed income assets (debt funds, bank deposits) as you approach retirement.

Asset classes for investment
These days, investors have a wide variety of asset classes to choose from, such as bank deposits, deposits with Non Banking Finance Companies and other company deposits, Non-Convertible Debentures, gold and other precious metals, PPF, NSCs, PO deposits, stocks, mutual funds, ETFs, Gold ETFs, real estate, REITs(Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts) and National Pension Scheme.

Bank deposits, PPF, NSC etc have very low risk, but real returns from them are low. REITS and InvITs are yet to emerge as popular asset classes. On the other hand, investment in stocks, either directly or indirectly through mutual funds or portfolio management services, can yield all the benefits of investment mentioned earlier. There is an element of risk in the short run, but in the long run there is no risk and the benefits can be substantial. History of investment during the last 150 years proves beyond doubt that stocks outperform all other asset classes in the long run. Rs 10000 invested in BSE Sensex stocks in 1979 (BSE Sensex which was 100 in 1979 is now around 30000) would have a market value of around Rs 30 lakh today, excluding dividends. On the other hand, Rs 10000 deposited in a fixed deposit in a bank in India in 1979 would be worth around Rs 1,50,000 today.

A major attraction of investment in stocks is the tax advantage. Dividends are exempt from tax up to Rs 10 lakh a year. Dividends from equity diversified funds and balanced funds are completely exempt from tax. Another major attraction of investment in stocks and equity/ balanced mutual fund is the exemption of long-term capital gains from tax. Long-term capital gains are the gains accruing to investors when they sell stocks at a profit after holding them for a minimum period of one year. For those in the high tax brackets, this is very attractive, indeed!

Insurance and home should be priorities
If you have a family, which is dependent on you, life insurance should be a top priority. A term insurance would be most desirable. Similarly, in this age of increasing life expectancy and rising medical expenses, health insurance is important. Since interest rates, particularly for home loans, are low presently, this is an ideal time for acquiring one’s dream home through home loans.

After meeting the EMI for home loan and life and health insurance premia, the balance investible funds should be invested in appropriate asset classes based on the investor’s risk profile.

Investment and risk appetite
How much and where to invest should be decided on the basis of your risk appetite, which in turn will depend on your age, wealth, income, expenditure commitments etc. As a general principle, it would be ideal to have an aggressive portfolio in the early phase of one’s career, say up to 35 and then moving on to a balanced portfolio till age 50 and thereafter opting for a conservative portfolio.

A sample is given below:

a) Aggressive Portfolio
A young person, in the early phase of his/her career, should opt for an aggressive portfolio. Here 75 percent of investible funds may be invested in equity. 20 percent may be invested in debt funds/ bank deposits and 5 percent in gold bonds.

b) Balanced Portfolio
Starting from middle age up to, say, 50 years of age, investors should ideally opt for a balanced portfolio, where 50 percent of investible funds may be invested in equity. 40 percent may be invested in debt funds/ bank deposits and 10 percent in gold bonds.

c) Conservative Portfolio
As one approaches retirement, investment strategy should shift to conservative mode. As a general principle, it can be said that equity investment share of the portfolio should be brought down and the share of debt/bank deposits should increase. 25 percent in equity, 65 percent in debt funds/bank deposits and 10 percent in gold bonds can be a general norm here.

However, it is important to note that this a general principle. The asset mix of the portfolio should depend on the risk appetite of the investor. It is quite possible that a very senior person may have a very high risk appetite. In such cases, the equity component of the portfolio can be much higher than the conservative norm.

Youth should opt for an aggressive portfolio since their risk appetite is high. Particularly double-income families can afford to have a very aggressive portfolio since they have very high risk appetite. A significant part of savings should be ideally in stocks. Since direct investment in stocks require financial expertise, it would be desirable for investors without this expertise to invest in stocks indirectly through mutual funds. SIPs (Systematic Investment Plans) are the best way of investing in mutual funds.

Investment in gold should be ideally through gold bonds. The choice between bank deposits and debt funds will depend on the interest rate scenario and rate expectations. The tax slab of the investor is also important. Debt funds are more attractive than bank deposits in a falling interest rate scenario. Falling interest rates push up bond prices benefiting debt fund investors. Apart from the asset classes mentioned above, it is important to keep money equivalent to six months expenses in a savings bank account or liquid funds to meet emergencies.

India has the best structural growth story among emerging markets. Investment in stocks/ mutual funds is investment in the emerging India growth story. Therefore, equity should be an essential component of any portfolio. The returns, in the long run, are bound to be substantial.

(The author is Chief Investent Strategist, Geojit Financial Services)

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