Skip to main content

Asset Allocation – Has no secret formula

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

 

A retired civil servant of my acquaintance called recently. An honest man, he didn't take money or favours while in service. His only major asset is his membership of a co- operative housing society. Now on the verge of 70, he is completely retired and lives in that co- op flat. It has multiplied in value and on paper, he is quite wealthy.
 

In practice, he is cash- poor and worried. His pension allows him to maintain his current life style but with little to spare. Inflation over the past three years has eroded the value of his pension and it will soon become inadequate. He is in decent health and could easily end up in poverty in extreme old age.

If he sells the flat and moves to a cheaper place, he will generate some surplus cash. He must invest the surplus intelligently to beat inflation. One of his ex- colleagues had suggested that he park some of that in equity. He has never touched stocks. This was what he wanted to discuss.

After some discussion, I told him the truth as I see it: "If you invest sensibly in the stock market, you will probably earn excellent returns over a 5- 7 year period or longer. You have to be braced to forget about the money for at least 3- 5 years. There is a small chance you will go bust. There is also asmall chance you will earn massive returns very quickly. You must be mentally prepared for those extremes. If you think youll live till 75- plus, without needing to touch the surplus funds, invest a proportion of your funds in stocks. If you dont want the stress, or the risk, invest in debt. Your money will lose value, but youll probably have enough to last out your lifespan." This is a classic problem from life cycle investing. The underlying assumptions are simple enough. Stocks are risky and volatile. But in the long run, they beat inflation and outscore other instruments. Debt is safe, but loses out to inflation in the long term.

If you start a financial portfolio early in your career and hold it through retirement and beyond, your asset allocation should change to reflect your age and risk tolerance. In the early years, the portfolio should be heavily weighted in favour of equity. This gives a better chance of getting high returns without suffering from volatility.

As you grow older, the equity component should decline and debt should play a larger role. One of the dangers for an elderly person holding a lot of equity exposure is that he or she may need to liquidate it for ready cash in the middle of a bear market. In that case, the savings may be wiped out by a temporary downturn.

The life cycle investing concept looks logical in theory. In practice, it is a messy, "fuzzy" process deciding the ideal asset allocation levels. Different people have different risk tolerances and different aspirations. One size doesn't fit all where asset allocations are concerned.

Nobody knows how long they will live and this is also important when fiddling with asset- allocation. If you switch over to debt too early, you may end up cash- poor in your last days. If you hold onto equity too long, you may be hit by emergency medical expenses and forced to accept capital losses.

Average life- expectancy tells you little about personal life expectancy. Specifics like genetic make up and lifestyle play a big role. Life expectancy statistics are skewed downwards by infant and child mortality, and because young adults are more likely to die in accidents, or violent incidents.

You may be very lucky if you started investing in 1991 or 2003 just before the market went into a long bull run. You may be unlucky as well. If you started investing in 1994, the equity returns would have disappointed until 1999. Again, there was a big bear market between 2000- 2005. Somebody intending to down shift equity allocations in that period would have had to bear losses, or defer his plans.

Techniques like systematic investment plans can reduce the negative effect of such long term trends. But they don't mitigate those effects completely. Even in the very long- run, volatility has some effect on returns and that effect may be beneficial or negative.

Life- cycle investors must also tackle a tricky set of problems when changing asset allocations. When you decide to increase or decrease equity exposure, should you do it at one shot? Or should you do it, systematically, reducing exposure a little, month by month? These are important details you must work out yourself depending on your personal risk tolerance.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...
Read more

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...
Read more

Stocks with a high dividend yield

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India) Stocks with a high-dividend yield can provide investors additional cash flow. More importantly, it is tax-free   With April 2011 just over, the 'earnings season' is well and truly here. This is the time most companies pay out a portion of their profits as dividends to shareholders. Since dividends are tax-free, they are an attractive income source with a select class of investors, who depend on these for additional cash flow. SIGNIFICANCE A company doing well and generating profits will usually be in a position to declare dividends regularly. Hence, a key parameter one should look at whilst investing in a stock is whether the company has a good dividend record. Typically, dividend yield stocks are large-caps and generally not capital-intensive. This is suggestive of the fact that the downside risk on...
Read more

Systematic withdrawal plan

  Start Systematic withdrawal plan Online Although an SWP gives you regular income and saves on taxes in the long term, you cannot open an SWP on a scheme where you have an ongoing SIP   iStockPhoto If you are planning to take a sabbatical from work or are retiring soon, you may be looking at different investment options that give a regular income. Usually, a lump sum is invested to get regular fixed amounts later. Popular products include post office monthly income scheme, Senior Citizens' Savings Scheme and monthly income plans (MIPs). A lesser known option is the systematic withdrawal plan (SWP) in mutual funds. Recently, some funds have even removed the exit load on SWPs if you were to withdraw up to 15-20% in the first year, to encourage people who want to start investing in this instrument. Here is a look at what an SWP is. WHAT IS SWP? Many of us would be familiar with a systematic investment plan (SIP ), where a corpus ...
Read more

UTI Equity Fund Invest Online

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   UTI Equity Fund   Invest Online UTI Equity is a large cap-oriented fund with assets under management worth Rs. 2,269 crore (as on June 30, 2013). The fund was originally launched in May 1992 as UTI Mastergain and is benchmarked against S&P BSE 100. A couple of years back the name of the fund was changed to UTI Equity Fund and many of the smaller funds of UTI were merged into this fund. Performance The fund has outperformed its benchmark as well as the equity diversified category average in the last one-, three- and five-year periods. It has repeated the same in 2013 (as on May 31). Since its inception the fund has delivered an impressive 26 per cent compounded annual growth rate which is superior to its benchmark performance in the same period. Y...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now