June 14, 2021
The relentless rise in equity markets-globally and locally would have surprised many. This is even as we are still finding solutions from the raging pandemic. As financial planners our job has been to protect and grow our client’s wealth.
While external events are never in one’s control, the following steps would be a good way to build one’s financial portfolio:
1. Equity allocations (through direct equity and equity mutual funds) could be maximum between 35 to 50% of financial wealth. Conservative clients like Retirees could have the allocation not more than 25% in equity. This will help one to participate in the upside (if any) and also reduce the downside. Exit all non-core direct equity and equity mutual fund portfolio now. While investing fresh money in equity assets, do note the above allocations in mind.
2. Allocate wealth to Gold of at least 5% of your financial wealth (some can increase this to 10% too if further corrections happen in Gold prices). Resident Indians can do through Sovereign Gold Bonds (SGBs) and NRI’s through Gold Mutual Funds. Gold will not make you wealthy but protect the downside during severe financial market volatility, whenever the same happens.
3. REITs (Real Estate Investment Trusts) are good assets to diversify one’s portfolio into rent earning commercial Real estate. Invest between domestic REITs through stock exchange route (who have a demat account) and International REIT through Mutual Fund route. Invest 5% of your financial wealth here with 1% allocation to each REIT. Invest over the next few months weekly. REITs will not create tremendous wealth but would be far less volatile than equity assets.
4. Importance of Fixed Income cannot be overstated especially during the current times. This will give stability to the entire wealth and also some liquidity to participate quickly in case of large volatility in equity markets (whenever the same happens). Resident Investors can take exposure through debt and arbitrage mutual funds whereas NRI investors could invest in NRE and FCNR deposits (1-2 years’ time frame only). 15% of this portion could be liquid options for emergency or to exploit opportunities. FCNR deposits for NRI’s make sense so as to have diversified currency exposure. Minimum 50% (can go upto 65%) of one’s financial wealth should be in fixed income options. Do note that fixed income portion will never grow your wealth but only give stability and peace of mind. Do not chase high returns for this portion of the portfolio.
5. Strictly avoid (and if not possible limit exposure) to Cryptocurrencies, day trading, commodities/forex trading and derivatives. These are good hobbies for entertainment for a large part of the population.
The intention of a well-designed financial portfolio is to help one to reach their financial goals and not always to get the highest returns. As long as we manage the risks better- returns will take care of themselves. So, a focus on asset allocation (not put all the money in one basket- spread in equity, fixed income, gold and real estate), diversification (not to have a style bias within an asset class) and lower costs would surely help.
So, go and revisit your overall allocation strategy. Now is the time to do it!! If confused, then take the services of a fee only financial planner who can give an unbiased opinion of your financial condition.
Wishing you all a safe and exciting investment experience.
Equity allocation of my personal (including my family) financial portfolio has been scaled down below 50% recently.
1. Allocation to listed REIT can be done by investors whose financial portfolio is greater than Rs 1 crore.
2. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
3. Past performance of any asset class is not an indicator of future performance.
4. It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
5. The above are mere suggestions and not Investment Advice as individual cases might differ.