Basket of Eggs…!

The contents of this blog have often stemmed up from people, their eccentric behaviours and vague mind-sets, to be precise. As a man of finance, people with varied ideologies keep on speaking their hearts out to me – bringing out their hidden beliefs and logic, which at times funnier, intriguing and inspiring.

Amusing as these beliefs might be, they serve at least one purpose – to inspire me write this blog. Coincidentally in the last few days, there were at least 2-3 instances, where there was a clear one-track mindedness that I noticed.

A friend from work was excitedly talking about his recently opened Demat and Trading account and the so-called research he might have managed on his own in a few days. I had, as usual made him aware of jargon like the PE ratio, dividend yield, face value, market price, and other ratios to be looked at, in equity investing. As such, he had recently discovered the joys of a very high dividend yield on a specific share. He was almost on the verge of buying a minimum of a lakh worth of shares in the same company.

A few months back, another friend had also just begun equity investing through one of the popular platforms. He had recently read a news of a successful IPO listing. Now his mind was already drooling on the so-called attractive IPOs lined up. Without bothering to invest in quality stocks on the then bearish market, all he was interested was the grey market premium quoting on the next IPO.

A third case happened with a past senior colleague. He had suddenly invested a sizeable chunk via lump sum mode in thematic funds just because he read that a particular sector is bound to touch the roof.

All the above cases, simply go to a great length to show us a common human trait of following a new trend or whim that the media and social circles try to promote. We would see many such cases frequently. The worst part of this trend is that, it changes more often than you would want it to. After a slew of low returns in active funds, one might divert all the investment in passive funds. After burning one’s fingers in debt funds, one would simply do away with mutual funds and concentrate on Fixed deposits only.

We have been taught to not keep all our eggs in one basket. Yet, there would be numerous such examples where people follow trends wholeheartedly while conveniently ignoring their asset allocation and by choice end up losing their eggs to this cruel world!

Yes, the topic for discussion today revolves around this two-letter phrase – Asset Allocation. Does allocation mean only debt and equity? The answer is obviously no.

Asset allocation as a term, is actually more than just an excel sheet or a pie chart showing the ratio of individual category of investment to total investment. It is more than just marvelling at how high is one’s investment in a particular asset category with a very high ROI. People try to maximise investing in such high yielding (and equally high risk oriented) investment and end up losing money in the long run.

It is very important to have a balance between all sort of investment avenues a person wants and needs to explore in his investment journey. It should be a golden mean between 3 key factors Risks, Returns & Liquidity. These might include –

1. Direct Equity i.e. investing in equity shares directly
2. SIP/lumpsum investments in Equity mutual funds
3. Debt Funds
4. Corporate and Bank and Post office FDs with fixed maturity
5. EPF, PPF and investment in NPS (long term tax efficient modes)
6. Gold (and gold bonds)
7. Real Estate
8. Any other

Striking a right balance between all or at least some of these is the key to have an investment, which might at best give out a median return on investment (ROI) at a median risk. (Median = not too high, not too low). Any investment sufficiently balanced and diversified over these avenues and across different periods of time, might actually end up giving you sufficient security, an above par return on investment at the desired level of liquidity.

So, does the story end here? No. Is there a thumb rule for this allocation? Also, No.

Allocation of investment between different avenues depends upon myriad factors, including access to and knowledge of different modes, ability to understand the actual fundamentals of any investment avenue, fear, risk averseness, time, amount of effort to be put in and the amount of contingency/emergency fund. At the cost of repetition from my previous blogs, emergency fund is perhaps the most ignored factor while investing. One should have a minimum of 6 months’ worth of expenses parked in a highly liquid (preferably bank FD) mode of investment. Personally, I feel it is ok even if ROI on such an investment is low (and hence bank FD would be my personal favourite for this).

Secondly, asset allocation done once in a lifetime also does not help! In a market at its peak, it makes total sense to part ways with some choice shares, trading at a decent profit level and park the money in a high yield Fixed deposit for good! Conversely, in a situation like pre-2020, where deposit rates as well as debt funds were not so lucrative, it would have been a fantastic idea to do away with these deposits albeit a bit prematurely and invest in equity! Asset allocation has to be dynamic, which again entails regular check-up of one’s investments and the rates of return generated.

I would go a level down in saying that within equity – it would always be wise to have a mixed portfolio of few top picks of high dividend yield stocks who would generate a yield of 7-12% of dividend every year! Market prices of such stocks then become redundant. Another part should be invested in stocks that are growth oriented – saleable stocks. These stocks maybe held or sale for short or a longer-term horizon.

Within debt also, one may choose to allocate one’s savings beyond the vanilla fixed deposits. Plethora of options including (AAA rated) Corporate FDs, Small savings schemes like PPF, Sukanya Samriddhi Yojana, RBI Floating Rate bonds, debt funds and like.

There are Exchange Traded Funds (ETFs) in gold and silver (a new entrant whose waters are yet to be tested).

All I am trying to put on the table is that asset allocation and its periodic update is relevant, (if not imperative) to having a good portfolio of investment to boast off. Of course, everything boils down to being in control of one’s finances…!

Happy Allocating!

For any further queries and discussions on this topic, I am, as always, a message/mail/call away…

Stay invested, plan ahead and stay vigilant!

Until then!!

Shreyas Parchure