Pankaj Singhal, an NRI in Qatar, invests in debt and equity, not in gold, owns an apartment, has an insurance cover and no loan liability. He is, however, unsure about how much he should invest in each asset class. Here we explain the rationale behind investing.
I am 38 years old. How should I decide on the optimum asset allocation for my portfolio?
The choice and proportion of each asset class depends on various factors, including age, risk appetite and goals of the investor. However, there are some thumb rules that act as broad guidelines for determining asset allocation.
TIME LINE |
|---|
Singhal's asset allocation at different stages of his life. |
| At 38 years |
| Debt: 48% |
| Equities: 42% |
| Gold/Cash: 10% |
| At 50 years |
| Debt: 55% |
| Equities: 30% |
| Gold/Cash: 15% |
| At 65 years |
| Debt: 70% |
| Equities: 15% |
| Gold/Cash: 15% |
| These figures must be used as a broad guideline only. |
EQUITY: According to financial planners, if one subtracts one's age from 80, the difference is the desired percentage allocation to equities in a portfolio. As you are 38 years old, according to this calculation, you should invest about 42% in equities. For investors who do not understand market dynamics, mutual funds are the best vehicle for equity exposure.
GOLD/CASH: One may conclude that the balance investments should be in debt. But a big lesson from the current crisis is that diversification across several investment categories reduces risk. Investors should keep aside about 5-15% of their stockpile for gold and cash. This is surprisingly missing from your portfolio. You can choose from coins, ETFs and jewellery to invest in gold.
DEBT: Within debt, the choice of a financial product depends on one's tax plan, degree of security, expected return and the period after which the money is required. You have wisely chosen the Public Provident Fund as a long-term investment, but you also have some tax-inefficient products like NSCs and KVPs in your basket. The income from these options is taxable, unlike the interest income from PPF. But as you are an NRI, you can invest in them as the interest will not be taxable in India if it does not cross the threshold limit of Rs 1.5 lakh a year.
REAL ESTATE: Real estate brings immense stability to finances. Though you own a Rs 25-lakh apartment, you should consider buying more property as the soft loan rates and correction in real estate prices should not be given a miss.
INSURANCE: An essential component of all financial plans is life insurance for earning family members. The cover should be enough to pay all outstanding debts and create a corpus that can earn enough to replace the income of the insured person. It's easy to estimate one's insurance needs with the calculators on the Websites of insurance firms.
As you do not have any loans, you shall need a cover of about Rs 60-70 lakh. This will generate a monthly income of Rs 50,000-60,000 for your family (assuming an 8-9% return). Term plans are a good option as they offer large covers at low prices compared with endowment and money-back policies.
Financial strategies are dynamic and must be tweaked according to the change in circumstances. Your decision to invest in a pension plan is good, but it may fall short of the goals of providing for a carefree retirement. Assuming a 6% inflation rate, your current expenses might balloon from Rs 30,000 a month to Rs 85,000 when you retire in 17 years. So review your asset allocation regularly to check that your investments are enough for your goals. Also, customise all thumb rules to your profile for optimum results.
