For most people, financial decisions pertaining to investing, buying insurance or taking loans are erratic, rather than an informed and planned process.
This means that they have innumerable stocks and dozens of mutual funds without taking into consideration, the impact on their financial goals.
In this article, I am going to highlight some of the asset classes to help you determine the optimum mix and how much is too much per investment instrument.
Most of the people are often confused as to how they should segregate their funds. I recommend that you can start with a 4:3:1 mix of equity, debt and liquid funds and gradually increase the ratio to 6:3:1.
For most investors, 4-5 funds should be more than enough as it helps avoid duplication and makes it easier to monitor and manage the fund portfolio.
If you are overexposed to equity, especially if you are close to your goals, you could open your finances to risk and market volatility.
For example, if in your 20s, 30s or 40s, you have a higher percentage in debt than equity, then I believe you are dragging down your portfolio by sacrificing high returns, which could be crucial for achieving long-term goals.
As an asset class, debt provides stability and hedge against volatility but should be maintained in your portfolio for a short duration and in liquid instruments.
Debt should be seen as a replacement for fixed deposits and not as a long duration investment. The thumb rule to stick by is to follow the asset allocation as per your age bracket and the priority of your financial goals.
As like mutual funds, you don’t need a very big stock portfolio. Investment in around 8-10 stocks should be good enough if your budget is between Rs 2-5 lakh. Moreover, for investors who are just starting out, I would recommend not investing in more than 4 stocks at a given time.
While investing in stocks, be very clear regarding your goals, as markets are volatile and you may end up quitting in case you do not have a clear vision in mind.
Unit-linked insurance plans (ULIPs) are fast becoming favorites of the salaried class off late, especially as they are offering tax benefits equivalent to equity funds, comparable returns, and low charges.
Most importantly, if it fits in with your insurance requirements at a certain life stage or for a particular goal, it may make sense to buy a ULIP.
Also, ULIPs besides the tax advantage of up to Rs 1.5 lakh under Section 80C can be instrumental for long-term goals. It offers a minimum sum assured equal to 10 times the annual premium for investors below the age of 45.
ULIPs can be great wealth-creating tools for the long-term because of the diversity of funds offered and they are ideal for those who want to start young to ride on the equity advantage.
Most importantly, always remember that those who categorize their asset systematically over different categories of assets are able to garner the maximum returns in a sustainable manner in the long run.
Also, asset allocation is a dynamic process. Since your risk appetite might decrease with age, you should revisit your portfolio at regular intervals.