Indians have traditionally been one of the highest savers in the world, but they have rarely looked beyond the traditional asset classes. The coming decade promises to offer a lot of opportunities for investment. At the outset we must understand the difference between 'Saving' and 'Investment'. Typically, savings instruments take care of our liquidity needs, and they are hardly able to beat the inflation. The better part of our surplus money, therefore, needs to be directed towards investment, to enable us to acheive our cherished goals. The ideal way to plan for the future is to seggregate one's portfolio into: Core portfolio also known as strategic investment, and the other part could be the sattelite portfollio also called tactical investment. About 60-70% of the corpus needs to be allotted towards the core portfolio.
The Core portfolio should be made up of the following asset classes:
Cash/ Cash like instruments: These instruments offer the highest safety and liquidity, and help us to create a contingency fund to overcome unforeseen circumstances. Bank deposit form a large chunk of this asset class. As bank deposits typically follow the interest rate cycle, they tend to rise when inflation is high. It is advisable to get into long term bank fixed deposits when the interest rate cycle is at its peak.
Bonds/ Other fixed income instruments: These instruments are typically used for parking your surplus cash, when the outlook for equity and other risky asset classes turns negative. Rather than putting money directly into Govt./ corporate bonds one must invest through debt market schemes of mutual funds to take care of liquidity and diversification issues. These investments would give a slightly better return as compared to bank deposits.
Eqiuty: Also known as risk capital, equity markets are prone to more risk and volatility as compared to fixed income instrumrnts. But history tells us that in india equity markets have given far superior returns over longer investment durations. The core portfolio should include a decent amount of equity for all types of investors. Care should be taken to invest in divetrsified equity funds that invest in large cap stocks, which are less prone to volatility. Typically, the investemnt horizon for equity investemnt should be more than 3-5 years.
Bullion: Indians have been investing in bullion since time immemorial. Gold has been traditionally treated as a hedge against inflation. But strictly speaking gold has not lived upto this expectation in the long run. Gold is a typical asset class, whose price is determined more by speculation rather than the intrinsic worth. We generally buy stocks of companies based on their past perforamnce, but gold investment does not follow any such yardstick. However, gold must form atleast 10% of the core portfolio simply as a tool for diversification. The best way to invest in gold is through Gold ETF's.
Real Estate: Real estate also must form a reasonable part of the core portfolio. But we must keep in mind that this is one of the most illiquid asset class. While going for a second house/ real estate investment, one must identify a reasonable price for it - a common yardstick should be a rental of 4-5% of the purchase price plus the chances of a capital appreciation in excess of 5% per annum. While going for a residential property it must be noted that plots offer better rate of appreciation as compared to built up flats, become it is the price of land that appreciates, the price of construction does not appreciate.
Other asset classes or investment avenues should form a part of the non-core portfolio. Here active churning is required to take advantage of the dynamic pricing environment. The non core portfoilio can include investment in high beta mid-cap stocks, investemnt in commodities other than gold, and currency/ future and option trading. One must indulge in building this portfolio only if you understand their characteristics and market behavour. The next decade will also provide Indian investors an opportunity to invest in cross currencies and other physical foreign assets.
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