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Everyone has different attitude towards investing risk

Some believe that investing is about the equity markets. Others who bank deposits or contribute towards their Public Provident Fund (PPF) see themselves as savers than investors. The former group focuses on the performance of the market, and soar and sulk with the Sensex levels. To the latter, investing conjurs up images of speculation, and they like to be safe rather than sorry. But there are others, who have a bit of both worlds, and therefore, need a design to manage their money.

Many investors are likely to be allocators to fixed income assets, even if they do not overtly do so. Most salaried employees contribute to their PPF and allocate 15 per cent (including employer contribution) to fixed income assets. Unless they are hawkeyed about utilising surpluses, they prefer money lying in the account, or as deposits. Then, there are bonds for saving taxes, capital gains or infrastructure bonds. These investors may be active equity investors, but have a default holding in debt, which needs attention.

Those who choose post office monthly income scheme (MIS) or deposits, or PPF or MIS or income fund of a mutual fund, are exposed to risks, even if they believe their investments are safe. Most investments have an administered interest rate, which may not cover the cost of inflation. The interest is also taxable (except in case of PPF) leading to a lower real return. If they seek a higher interest rate, thus buying company deposits, or other higher paying instruments, they are also exposed to credit risk. These investors bear risks all the same, except that they do not face market risk that changes the value of their investments from time to time.

Once investors see themselves as holding a mixed bag of risky assets, they need to think about dealing with risk. I know of active stock market investors, who have not taken the time to close their second PPF account opened in the name of their minor child for years. Some have deposits and bonds that have matured, but not redeemed.

They may also have dividend cheques of varying amounts, lying without being deposited. They, perhaps, think that the gains they make on their active investments will make good all these lapses. They fail to see that their overall portfolio is bleeding from their negligence of the fixed income component.

Passive investors in debt instruments, who shun the stock market, sometimes buy into initial public offerings (IPOs), or tax saving equity mutual funds. Some may have also begun a few systematic investment plans (SIPs) in mutual funds. They bring in their fixed income orientation to this as well, trying to work with a maturity date in mind. Many sell the tax saving fund after three years, and IPO on listing.

Many ask me about what to do after an SIP has matured, unaware that it can remain invested. The worry about risky market values keeps them tensed, and they think that once all instalments are paid, the SIP should be redeemed. They fail to see how small doses of equity can enhance the return of their portfolio.

Many think that asset allocation is a theoretical construct, which tells you to put your money based on some formula. The asset allocation problem is what I have described above —the inability of investors to take a holistic view of their portfolio due to constraints imposed by their attitude towards risk. If we identify what our attitude to risk is, we will begin to solve this problem

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