With 2020 just around the corner, it is time to re-evaluate your money moves for a brighter financial outlook in the coming year.
There’s no better time than now to start planning your investments for the New Year. With 2020 just around the corner, it is time to re-evaluate your money moves for a brighter financial outlook in the coming year. Take a moment to go through your financial commitments and review your annual bank statements to assess your spending for the year. If you have a wealth manager, discuss the trends and investment options that can improve your financial health. The best approach is a right diversified basket of investments and the key is to know the right mix that optimises your outcome.
1. Fixed Income – popularly known as Debt funds – Begin with stability
Debt funds are stable, liquid and are relatively consistent performers with tax efficiency. They offer much better returns than Fixed Deposits (FDs). Debt funds have a wide array of choices, can be easily customized as per requirement for really short term 1-15 days (Liquid) to longer term like 5 -10 years (long term Bond funds). There are categories of funds that are easy to choose from based on liquidity and return requirements. Some liquid funds offer instant liquidity up to Rs 50,000 in 30 mins or less at any time of the day. Akin to a Recurring Deposit (RD), one can consider an SIP in debt funds to enhance returns and to enjoy liquidity.
2. Equities (shares) – The most potent part of the portfolio
The ability for equities to deliver superior returns which beat inflation make them the most inevitable choice for a portfolio. One has to manage this well by limiting the percentage exposure based on risk tolerance and time. Equities are not recommended for less than 3-5 year time horizon and not for someone who can’t be patient during market volatility. If you are looking to invest in equities, if you are a beginner, start with a Diversified Mutual fund. You also have multiple options of buying directly or investing in a Portfolio management service (PMS). The disciplined approach of consistent investing in equities is the best way to avoid market timing and volatility that one experiences in equities. SIP your way into equities.
3. Commodities – Gold, Platinum and Silver: Add Metals to reinforce
The golden rule of investing – Invest in Gold! For many years now, gold has been a favorite and continues to be so. The sheer limited quantity that there is in the world, demand – supply and the consistent hedge that it has provided against inflation makes gold a formidable contributor in one’s portfolio. Whenever we experience economic or other uncertainties globally, gold as an asset usually performs well. Apart from strong demand for jewellery, asset allocation in investors portfolio, gold is held by Central banks world over as reserves, additionally there are many industrial uses that make the yellow metal attractive investment. Don’t forget to invest in Platinum and Silver, both these precious metals have the ability to surprise us. Here’s a tip- platinum today is about 40% cheaper than gold (ref: NY Spot market) which is very unusual. There is some catch up that platinum and silver can do and reward investors handsomely.
4. Real estate: Advantage
Similar to gold, real estate is an all-time and old-time favorite. Real estate is an excellent store of value, providing capital appreciation, consumption value, income and leverage option, if required.The easy availability of financing options helps investors invest in real estate and get 5 -25 years to pay off while enjoying the benefits of owning and appreciation.
In the current context with significant increase of professional participants in the sector, investors have multiple options to access real estate:
# Buying real estate directly for consumption (residential) or investment: One can invest in residential and commercial properties for ownership, consumption, leasing & rental income.
# Owning equities in real estate company that are listed in the stock exchange: This provides great liquidity option and tax efficiency.
# Buying an Apartment – This is usually a finished product and most responsibilities of land acquisition, development , management and legal titles are handled by the real estate developer
# Investing in fractional ownership through investment funds and REITS (Real estate Investment Trusts)
However, real estate has its share of challenges in owning and liquidity. Though there is a common perception that one can’t go wrong in real estate investment, make sure that your legal and paperwork is in order for clear titles to ensure that these issues do not become a hurdle later.
5. Liquidity – Cash is king and liquidity is paramount
Availability of liquid funds or having a certain amount of cash savings is mandatory for everyone. It’s important to be comfortable enough to meet unforeseen needs and expenses. Having a cash balance can also help you manage a probable drop in income or an opportunity that arises due to asset price collapse, uncertain times and out out of the blue opportunities makes having liquidity a strong leverage to seize opportunity and manage uncertain times better.
6. Risk cover – Cover your assets, the biggest asset is your Health & Yourself
Though this does not qualify as an investment, a good risk cover can save you money from emergencies that arise due to health and sickness or loss of income due to death of the wage earner in the family. Periodic review of your health and life insurance is important to keep the sum of the cover relevant to changing needs. Apart from this, it’s also important to cover movable assets like – Automobiles, equipment at home or office and immovables like house or commercial property
In conclusion, as demonstrated by Nobel prize winner Harry Markowitz in his Modern Portfolio Theory (MPT), a diversified portfolio taken as a whole is less volatile than its individual asset components considered independently. Therefore, risk should be evaluated at a portfolio level instead of considering it at an individual asset level.
(By Santosh Joseph, Founder & Managing Partner, Germinate Wealth Solutions LLP)