Financial Planning mantra #2

Ensure a proper asset allocation before making any investment

Plan your resources in such a manner to give you maximum possible returns in achieving your goals. The three primary asset classes are equity, debt and cash. Some other asset classes include real estate, metals (like gold) and even art.

It is imperative that before making any investment you must ensure proper allocation. Asset allocation depends on factors like - age of the investor, time horizon available, holdings in current portfolio, etc.

In India, a lot of people buy financial products in an ad hoc manner, with the result that their portfolio is heavily skewed towards debt and low-return instruments - PPF, PF, money back and endowment policies, FDs, NSCs, debt options in ULIPs. All these have fixed or low-returns, thereby making them unsuitable options if you are investing with a horizon of 15 years or more. Of course, depending on your risk-profile, the amount of investment in equity (direct or indirect) would vary, but it has to form a part of your portfolio, provided you have time on your side.

Investors love to do their retirement planning (25-30 years from now) with debt as the sole option, not realizing that in the long run returns from debt are not as attractive as those from equity, resulting in lower corpus creation.

All said, it does not mean that investing in debt is bad. It is the proportion of the various asset classes that one must get right if you need to build a comfortable corpus. Too much of any particular asset class is bad since it either leads to increased risk levels or there is a chance that it may not even meet inflationary costs. Again, building a corpus needs continuous rebalancing of the portfolio depending again on things like new or fresh objectives coming up or when one is close to achieving one’s goal.