Use all asset classes while Investing



In India, most people look at one or two financial products as the solution for all their financial worries. This is because in India, for years, the transaction-based approach has existed as a proxy to financial planning and investment advisory services. However, it's about time this practice changes.

Traditional products worked well during our fathers' time when rate of interest on fixed deposits was 12% per annum and inflation was below 4%. Currently, however, FD rates hover around 9% compared to the overall consumer inflation rate of about 8%, and inflation on higher education and medical costs are even more. Yet, most people prefer FDs and conventional insurance plans that deliver poor post tax returns.

To a large extent, the fear of losing money prompts people to take such safe routes. But being aware of the real demon is extremely important. Consider this: Over a 34-year period, the sensex has delivered a compounded annual return of 17.85%. So, an investment of Rs 1 lakh 34 years ago is now worth Rs 2.68 crore. And such a phenomenal return has come despite some major events, crises, scams and disasters during these years.

However, very few investors have made such returns. That's because people who have overcome the fear of investing may still get caught in the behavioural biases of overconfidence, thereby attempting to time the market to beat it and in the process losing money.

Creating wealth lies in simplicity. Let me explain this in cricketing lingo

The planning

'Failing to plan is planning to fail'. Most people do ad-hoc investments. There is a need to understand the difference between a financial plan and financial planning. A cricket team's plan is like a financial plan, decided much before the players take the field. It includes studying the field, the environment, selecting the winning team, analyzing opponent's strengths, weaknesses, etc. However, when the actual match starts, a lot of the plan quickly gets adapted based on the situation that the team exists in. The plan acts as the guideline but it is certainly more important to navigate the plan, which is what financial planning is all about. A financial plan is based on assumptions and it is quite certain that those assumptions may or may not come out as envisaged. Hence, there is a need to review the progress and navigate them to the goal.

Target score

Irrespective of the team batting first or second, each team keeps a target score in mind. Similarly, investors must ask some questions before they start their investment journey. These can include: What are they saving for? How much will they need for their children's education? How much should be the retirement kitty to live a comfortable retired live? etc.

Game format

The strategy for a 20-20 game is different from a one-day match which, again, is very different from that of a test match. Likewise, short-term goals must be funded by fixed-income products, whereas growth assets such as equity or equity funds must fund only long-term goals.

The team

A winning team comprises few good batsmen, few good bowlers and good fielders. Similarly , not always all asset classes perform simultaneously. It is seen that each asset class performs under a certain situation and economic environment. So, an investor's winning team must comprise of investments across all assets classes, such as fixed income, equity, gold and real estate.

Optimize player's potential

Investor's risk tolerance and time horizon of the goal plays a critical role in deciding the winning combination of assets. The winning team must try to optimize returns within each asset class. For example, if someone is conservative and has a higher debt allocation, then FMP and debt funds for over 3-year period, or tax-free bonds could be a better alternative to FDs.

Focus & hold your nerves

The mind set of players always plays a crucial role in winning. The winning team's body language gets reflected on the field. Players are also trained about the external environment which they can control, so all they should do is to control their own self. Investment is no different. No one can ever predict or control the market, so one has to keep their goals in mind and have to ensure that the products selected will enable them to reach their goals by re-balancing their asset allocation periodically .

Keep faith in your team

Holding one's nerves becomes easier if there is conviction in the products one is invested in. Ask yourself simple questions like: Is it going to help meet any of the goals?
Does it fit the risk profile and time horizon of the goals? If the answers are yes, then only one should invest in those products.

h Make best of both batting & bowling

Don't look at only returns from your investments, but look also at the time horizon. Add the exponential factor to build your wealth.