From buying a house to holidaying in a dream destination, aspirations know no bounds. And we work hard and save harder to achieve these dreams. We often compromise on our momentary happiness today to save for tomorrow. However, how planned is our roadmap to attaining these aspirations?
Reaching your goals in time requires discipline and planning. And asset allocation plays a crucial part in financial planning. Asset allocation refers to diving your money and diverting it to different investment assets to balance out the risk versus the reward. The ratio of allocation would depend on your risk taking capacity, your goals and your investment horizon to attain your goals.
The asset allocation may vary from investor to investor. In order to determine the right asset allocation for you, start with identifying your goals and then choose the investment assets that best suit your goals.
Classifying goals based on tenure
Articulating your goals is important to understand how much time you have in hand and how much you need to invest. This will guide you to zero in on investment products that will help you arrive at your goals. Tenure-based goals can broadly be classified in the following three groups.
These include clearing off credit card bills, pre-paying of loans, boosting of emergency funds, things that allow you an investment tenure between six months to one year. For goals like these, your risk appetite is low, and the need for liquidity is high as the investment tenure is short. In such cases, capital preservation is more important than aggressive growth. Bank fixed deposits, liquid mutual fund and short-term debt funds are your go-to investment assets as they are liquid and low cost. Based on past data, you can expect your annual returns to be between 6-9% from these investments, depending on the macroeconomic conditions.
While fulfilling short-term goals is priority, 50% of your remaining savings can go towards building a fund for meeting medium-term goals. These goals could be anything from buying a car to raising funds for getting married, or making the down payment for a house. Since a medium-term goal involves a slightly longer tenure, you can afford to take moderate levels of risk by investing in equity. You have an investment tenure of one to six years and your go-to assets are large cap equity mutual funds, corporate deposits, monthly income plan, ELSS and National Savings Certificates.
These would include planning for retirement, raising funds for children’s higher education and marriage, and buying a house. The investment horizon here is six years and above. Therefore, you can afford to take moderate to high risk, allowing your money to grow faster in the long term.
For a risk-free approach, try PPF. For moderate risk, try equity-oriented balanced funds. For higher risks and rewards, try diversified mutual funds, and also make smaller allocations towards mid-cap and small-cap mutual funds. Given the long tenure, you can allocate a significant portion of your savings, say 80%, in equity investment and the remaining in high-return debt. Say you need a corpus of Rs 10 lakh after ten years to pay for your children’s higher studies. Invest Rs. 5000 a month in a mix of equity and debt instrument with a CAGR expectation of 10%. This would fetch a corpus of Rs 10.3 lakh in 10 years.
Reviewing investment allocation
Your portfolio requires rebalancing from time to time, with increase in income and changing market conditions. Your goals and risk appetite may also change with age, so make sure you make necessary changes to your portfolio to suit your changing requirements.
By Adhil Shetty