Portfolio Management - Part 2

After my first blog, readers or rather friends asked me to explain the concept of ‘Right Investment at Right Time’. I thought of explaining this with an example of a friend of mine (Sagar) and his family.

Sagar is just completed his MBA and his currently working with a private sector. His family consist of his father (businessman), mother (housewife), and a young sister (student). Over dinner we were discussing his investment plan. His family’s current investments would be life insurance, equity, PPF, gold, property. Now his dilemma is, where should he invest?

Let us first take life insurance policy; who should buy it and when should it be brought. One should keep a regular investment in insurance policy in that age bracket of 25-40. What should be the amount? It will all depend on lifestyle that you wish to offer your family in your absence from this world. Now the most important question, “Who should buy or on whose name should it be brought?” It should be brought for the person who’s lost of life would impact the most, financially. If we take Sagar’s family, today it would be his father on whose name the policy should be, but he is well insured, so Sagar should now start looking for some good policy for himself.

Equity is one investment that would over a longer period outperform other form of investments. One should start investing in equity early in his life, either directly or through the mutual fund route. With the SIP format you need not worry to time the market and just invest in good funds and enjoy the benefits in those late 40’s and early 50’s, where you may even think of taking up retirement.

Public Provident Fund, something that gives you a steady return, tax benefits. But do keep in mind that the real return would be somewhere in the range of 3-4%, after taking the inflation into account. One should keep it to the minimum that is required for tax benefits in the early stage of work life and increase gradually as you get older. They say (don’t ask me who), that one should keep the bond: equity ratio of their investment according to their age, for e.g. Sagar is 24 now, so he should keep 24% in bonds (fixed rate instruments) and rest in equity (or the so called risky instrument).

Gold has traditionally been the most favourite investment option for Indians. It is something that is used in all our occasion, festivals, marriages; so one need not bother about any profit/loss on this investment (unless you sell). Sagar’s father is no different to other Indians and has invested a good sum in gold and he has to, after all he has a daughter. Gold ETFs is the new buzz word in the Indian market. It is safer, easier to buy, more reliable than those gold bars and definitely more cost effective (the storage charges).

Property or real estate is something not very hot favourite investment avenue. It is capital intensive and also time consuming, so most people avoid it. Sagar’s father is also not very keen on property it is just that his fore-fathers had this Havelli in Rajasthan which now belongs to him. Also he has a 1BHK that was his first owned property when he moved to Bombay (now Mumbai) and it is given on rent as they have moved to a 2BHK.

The question still remain unanswered, "Where should Sagar invest?”

Sagar is young, just started his career and his take home salary is about 35 thousand per month. His father manages to get something in the range of 50 to 60 thousand per month. Their monthly expenditure would be in the range of 30-35 thousand and contribution to PPF and insurance would be 2.5 lakh per annum. So what is left as saving with the family is around 3.5 to 5 lakh per annum.

Firstly, Sagar is not insured and in case something wrong happens to him it would put a lot of financial burden on his father, who is already 49 and thinking to shrink his business and devote more time to God. So get insured. They have taken a mediclaim for his mother, I would advise the same for his father; medical expenses these days are huge and you don’t want your love one’s to be suffering in those shady government hospitals. Investment in investment would help him save some tax, 20% of premium. PF and pension scheme should be the other tax saving instrument. Pension scheme would help him leave a better retired life without compromising on the lifestyle.

Sagar’s sister is 21 and probably in a period of 2-3 years they would start looking for a groom for him. That is the time when even Sagar would be looking to settle down in his life. So they would need a good sum of money to meet the marriage expenses. Sagar’s father has a good investment of gold to meet both his son and daughter’s marriage requirement. But there are other expenses also, so it would be appropriate for Sagar to put money aside to meet those expenses, the investment could be either in equity or fixed deposit instrument, fixed deposit would be more appropriate.

Sagar’s father has taken most of his son’s burden, so Sagar has now to focus on insurance, pension plan and if required, some tax saving instruments like NSC. Than based on his risk appetite he can choose from a bunch of investment options like FDs, mutual funds, gold, etc., for his sister and his own marriage. Also would be advisable to keep some 35-40 thousand in very liquid fixed rate instrument at any time to meet those unforeseen needs as stated in the earlier blog.

Portfolio Management

It is quite important for each one of us to have a portfolio of investment for ourself and our families future security. The portfolio should have a mix of various instruments available in the market, for e.g. equity, fixed deposit, provident fund, commodities (gold/silver), insurance, etc., the proportion may differ from individual to individual based on their risk appetite. Now, the question is how does one decide what is a better investment option currently for him/her and what proportion of their saving should go in each of the instruments.

There are various things one need to think before making the choice of the instrument.

• Firstly, the purpose of the investment, for e.g. if you are looking to invest so that you could have enough for you little princess marriage, one instrument for sure should be Gold ETFs.
• Secondly, time frame, when do you require the money back? Instruments like provident funds would offer a better return as compare to other fixed return instruments, but the investment period out here is 15yrs, that's too long.
• Thirdly, flavour of the market, one need to understand what is doing good and what not, in the current scenario, for e.g., if one looks at the equity market in India, there are stocks that are undervalued and this gives us an opportunity to make the most for ourself. With interest rate going down an undervalued stock would always give a better return for let say a period of 1yr.

One need to understand that there could be an immediate requirement of cash for an unforeseen event. I would therefore advice to keep 10% of their saving in bank account, this is not a standard requirement and hence one can tweak it according to once requirement.

Wealth creation is not an difficult task, but it is something that can be achieved by applying common sense and basic understanding of various markets. Lastly, for your benefit, if you don't understand the world of investment or don't have enough time to study the market, don't hesitate, take help of people with expertise knowledge, look for CFPs, it's their business they will do it better.