THE CAPITAL MARKET is booming and the feel-good factor is back in play. It seems very easy to make money in the stock or IPO market. But it is important to control greed and temptation. We should not to be either overly optimistic in a bull market or overly pessimistic in a bear market.
My slogan for sound personal investment is: “Save, Insure, Spend and Enjoy”. An investor should first save for his basic needs and create a portfolio with gradual scaling of risk profile. Thus an investor should first take full advantage of all assured-return, tax-free investment schemes that are on offer. Once this avenue is fully utilised, the balance savings should be divided between debt and equity investments based on the risk profile of an investor.
The risk profile of an investor is based on age, health, income group and liabilities. For an average investor, a 25:75 formula for equity-debt mix would be safe. An average investor should regularly invest in equity and debt in the ratio of 25:75. The investor should also set a target return for both equity and debt investments. On reaching the target, the investor should book profit and reinvest the profit in the same 25:75 ratio.
This is for an average investor. The ratio will change with the risk profile of the investor. Those who prefer to invest in the stock market directly may earmark 25 per cent (out of the 25 per cent equity component) of the money. However, the balance 75 per cent should be invested in sound equity mutual funds.
My benchmark for a sound equity mutual fund is consistent, above average performance over a period of time (and not necessarily the best at a given point of time) from a fund house having excellent track record as a reliable, stable, transparent player. Out of the 75 per cent in fixed income, 25 per cent may be put in bank deposits. The balance 75 per cent should be invested in good fixed income mutual funds, most of which have given high post-tax returns.
Apply the same norm for selecting sound fixed income schemes as prescribed above for the equity schemes. Along with savings comes insurance. An investor must insure life as well as valuable movable and immovable properties. This is an important tip for safe personal finance, which is known but not often practised — resulting in very low relative penetration of insurance in India.
An overall personal investment profile is never complete without spending. It is important to spend in a planned and strategic manner. An investor should use part of the savings to own property for shelter over ones head. Thereafter he/she should use part of the savings/investments as margin for assets of comforts — consumer durables, vehicles — or even personal/educational loans when required.
We have truly moved into a buyer’s market today, whereby with a disciplined approach a consumer can profitably have the cake and eat it too. The “Save, Insure, Spend and Enjoy” can today easily be the modern formula for “healthy, wealthy and wise” lifestyle.
(The author is director, financial services, Aditya Birla Group. The views expressed in this article are his own.)