Being mindful of the right allocation

It is essential to diversify among assets and have a good mix of equity and debt investments


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A friend recently called to enquire about some investment plans being recommended by her adviser. She has been investing in systematic investment plans (SIPs) but had some surplus to be invested regularly. The adviser had recommended a 20-year investment plan, which would yield 12-13% return. On probing further, it turned out to be a unit-linked investment plan (Ulip) with high exposure to equity. The other investment recommended was a portfolio management service (PMS). This was suggested over equity funds, stating the ability to give higher returns since the fund manager would focus only a concentrated portfolio.

It is obvious that the suggestions were based on the high commission on these products.

The friend already had SIPs in equities and the investments being recommended would skew her portfolio towards equities. But the adviser told her that the portfolio would be well diversified with the equity SIPs, the Ulip and PMS. But what about liquidity? Money is not available on demand from Ulips. Also, if equity markets were down, then the entire portfolio would be at the risk of underperformance.

It is essential to diversify among assets and have a good mix of equity and debt investments, i.e., follow asset allocation.

Most institutional advisers have so much revenue pressure that they simply do not focus on asset allocation. Or maybe they haven’t been trained on this subject. In this case, the client is a high networth individual (HNI) and even then there is no effort being made to follow asset allocation.

What also surprised me was that the friend had no funds invested for the short or medium term. In case of contingencies, she would not have been able to remove money easily as her portfolio was equity heavy.

Most investors really do not think of asset allocation. Traditionally, most Indian investors have their financial investments concentrated in fixed deposits and Ulips. But these days, I see a higher allocation to Ulips as they are being sold as high-yielding fixed return investments that can give better returns than fixed deposits and have low risk.

This strategy of investing into fixed deposits and Ulips, and having a minuscule exposure to equity SIPs would not help beat inflation, forget meeting any long-term goals.

How may people really know how much they have to save for their financial goals? Typically, for the salaried class, they invest and then plan where to use the investment, whereas it should be the other way round—establish the need, find out how much to invest for it and then decide the instrument. This way one can identify how to allocate funds for short, medium and long term.

This is also a good way for people to figure out how much exposure they can take to risky and non-risky investments. Most investors are not sure and/or do not have the knowledge on various financial products and would typically go by the adviser’s suggestions. Conflicting information on various instruments further confuses.

So how does an investor go about planning her finances?

Firstly, financial planning is a must. There are free financial planning calculators online which can be used to at least get a basic plan for one’s goals.

Then comes the most important part—allocation to various instruments. For long-term goals, equity based investments work better whereas for short-term goals, fixed return-based investments like debt funds would be preferred.

The asset allocation is based on goals, time frame and risk taking ability, and is the primary determinant of a portfolio’s return. While staying invested as per your allocation is imperative, it is also important to have a diverse set of assets for this to work. There is no perfect mix that works for everybody, so one needs to make sure their allocation is appropriate for their goals and risk appetite.

In my friend’s case, she could accept volatility and take risk but she had not diversified her investments. Hence, I asked her to set up an emergency fund from which money could be easily accessed. I also asked her to invest some money into medium-term debt funds.

In my sessions, I find young participants being skewed towards fixed deposits and Ulips. I urge them to move to an allocation of at least 30- 40% in equities. This way they have a better chance of higher returns.

With this financial year ending, it’s a good time to check the asset allocation of your portfolio and make required changes.

Mrin Agarwal is a financial educator, and founder-director, Finsafe India Pvt. Ltd; and co-founder, Womantra.

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