DIVERSIFICATION AND ASSET ALLOCATION WHAT DOES IT MEAN.

DIVERSIFICATION AND ASSET ALLOCATION WHAT DOES IT MEAN.

During my interaction with various people in the course of the financial conversation, I come across two types of people. One of those who do not wish to move out of the Bank savings account, FDs and probably post office schemes and on the other hand those who actively wish to have exposure in equities.

I agree that the latter category is in rarity on its own but if you speak with the former category few of them do convert to equity investors.

Now once this class converts to equity investors and they see profits raining they tend to go overboard and start putting most of the savings or all of the sayings in the equity through mutual funds or direct stocks.

At this moment they start seeing everything right with the equity and everything wrong with the low yield in fixed returns schemes like the banks and post offices offer.

Now which of them is correct? Obviously none of them!

One must at this point start to appreciate the concept of Financial Cauldron which I had introduced a few years ago.

This Financial Cauldron is essentially a pot which contains all your Savings and investments in all form of assets.

But why is it necessary to have everything in that pot of soup when the equity is the best returning and most tax efficient.

An equity investor who has entered the markets in last 5 or 6 or even 7 years has only seen the market going up he may have seen fluctuations and correction but he has not really seen a bear market.

The 8 to 10% fall which they have seen in the last 3 months can be sharp 20-22% or even more and can extend upto 1 or 2 years or longer.

As such  depending upon their life stage whether they are young or old , they start to lose the peace of mind and start to get worried because it is not easy to see one’s corpus go down by 25-35 and 50% in a matter of few weeks, but that may not be a remote possibility.

So what does diversification mean in context of India at least. I can speak about India because I am aware of the few options that are available in this country the readers from other countries should also explore similar ones in their own countries.

1.     Should I invest in PPF and waste the opportunity for a return of less than 8%.

My reply is yes if you as a NRI cannot invest or open a PPF account on your own you must try and open it and run it in the name of your spouse and children as far as allowed by the rules.

If you trying calculate the value of these periodical PPF deposits that you will make with the rapidly changing interest rates also you will find that in a period of 30 years the amount is fairly handsome. And more than Handsome when you consider that the proceeds are entirely tax free if removed and used for consumption.

Whatever other financial analyst may say about PPF but as seafarers it is rather necessary that you invest your higher salaries partially into PPF because after 15-20 or even 30 years you could withdraw amount from this PPF account for your consumption. And if need be you can remove from there and put it in your other Investments.

As I always say that post retirement one must try to keep their monthly income tax efficient or zero tax as far as possible.

2. Should I invest in Sukanya scheme in my daughter's name.

The answer is a resounding yes. And it is a yes precisely for the point that I have mentioned above. With the higher earning that you do it is rather insignificant amount that you will put into this excellent plan which works and slightly better than even PPF and may be helpful to your daughter when she goes to college.

3. Why exactly I am I opting for these low yield avenues.

My reply to this is- the dynamic and ever changing policies of the government.

As you may have seen during these past decade how various governments change the rules during the budget making some schemes taxable and making others tax free at any given time. Or even increasing the load of investing in particular schemes.

For that matter even the rules for PPF changed so fast that it is difficult to keep up with them.

In the scenario it is important that in keeping with the laws of the day you look into a particular scheme and let it run till it is advised by the government that it cannot be continued for a particular class of savers.

So what should my Financial Cauldron be like...

Bank savings account in NRI/ NRO - Yes

Bank NRE FDs yes

FCNR deposits- YES

PPF – YES

Sukanya scheme-YES

Equity Mutual Funds-YES

Debt Mutual Funds-YES

Gold in Demat form-Yes, slightly

Gold in bullion form- YES up to 5%

Real Estate ,Land- YES for your own house and maybe just one piece for investment purpose in case you wish to change the house tomorrow.

A good nice big expensive car sorry that's not an investment. That is why I have kept it out of the box.

Up to what extent should I invest in the above avenues?

For the small savings there is a cap but for the other ones there is none.

At the end of the day I can safely say that you must allocate your Assets and balance them very vigilantly so that over extended period of time of 5 to 7 years or even 10 years you get a overall return of 10% on the complete portfolio and when I see complete it means all the above things when put in your Financial Cauldron.

There is one thing that I have left out and that is the Senior citizen Saving Scheme and the Prime Minister VAYA VANDANA Yojana.

These are necessarily for your parents and the question arises that should you be investing in them.

Now for obvious reasons I cannot advise you to invest in them and it depends entirely on your domestic condition and relationships between different people.

But yes as per law you can gift any amount to your linear ascendant or descendant blood relations.

I'm considering these schemes as they carry a slightly above market interest rate that is about 1.5%.

The maximum cap for investment into these two schemes is 7.5 lacs in single name and 15 lacs jointly.

You may invest in these schemes if your parents do not have the retirement Corpus of their own.

This will make them slightly more secure and give you lot of satisfaction too.

But the take home lesson from the above is to maintain an asset allocation of Equity to debt that you are comfortable with. In the debt you can count everything except the real estate.  After that keep re-balancing the allocation ratio as you keep earning or as the assets start giving attractive returns or the market nosedives down. The Asset Allocation Ratio must be considered very sacred and adhered to. If this is done – you will be able to override any market condition.