There are many investment avenues to make money. Having a corpus of fixed deposits alone can be good enough in long run only if it is sufficiently large. With high inflation rates prevailing in India returns from an insufficient corpus can wane away rather quickly. Both FDs and equity have their own set of advantages, risks, and potential returns. A key question is what is the right proportion to invest in equity. Read on…
There are many asset classes, fixed deposits, company stocks and mutual funds are some of the key avenues available for investments. While selecting the right mix of assets can significantly impact long-term wealth creation, this article covers need to strike a right balance between FDs and equities. In spite of its potential, the equity investments are viewed with skepticism and do not appeal many Indians.
Anchal, started her career fifteen years back in a PSU. She spent all her income on food, clothing, gifts and occasional vacations. Her investments were limited to mandatory provident fund deductions and she kept minimal amounts in saving accounts. She was happy living paycheque to paycheque.
Bhumik, worked in a bank, and was due for retirement in two years. In addition to mandatory PF deductions, he invested in PPF, NSCs and a few fixed deposits.
Chandan, inspired by his financial education, started equity investing very early in life. He changed two jobs in five years with different global consultancy firms. During the period he made investments in shares and equity mutual funds to have a portfolio of 27 lakhs, with minimal amounts in saving accounts.
While FDs offer stable returns and are ideal for conservative investors, they are not suitable for financial wellbeing of investors. Equities, can potentially deliver much higher returns over the long term, however the same are riskier as they are subject to market fluctuations. There should be a mix of equity and FDs (or other debts) based on the risk appetite of the individual and not on personal biases.
Learning from the NPS Model
Regarding the ideal inclusion of equity in the portfolio, we may consider the norms as in case of National Pension Scheme (NPS). A general investor may also take cues from the NPS model and adjust their portfolios. NPS offers active choice and three auto choices to subscribers. Equity allocation allowed is more in case of younger subscribers and is progressively reduced with the age. Please see details below:
| Choices available | Equity Exposure at the lower age bracket | Equity Exposure at the higher age bracket |
| Active Choice: Individual Funds | Maximum75% upto the Age of 50 years | Maximum50% above the Age of 60 years |
| Auto Choice: Aggressive Life Cycle Fund: | 75% upto the Age of 35 years | 15% above the Age of 55 years |
| Auto Choice: Moderate Life Cycle Fund: | 50% upto the Age of 35 years | 10% above the Age of 55 years |
| Auto Choice: Conservative Life Cycle Fund | 25% upto the Age of 35 years | 5% above the Age of 55 years |
Source: Investment options under NPS
Above matrix is based on the age alone. However, there are other factors that may be considered for ideal proportion of equity investments. These include financial situation, risk tolerance, investment horizon, financial goals and market conditions and valuations.
Anchal and Bhumik in above cases have not followed right approach by altogether negating equity investments. They are in different age brackets. Anchal who is at the middle of her working career can follow a more aggressive approach. At the same time Bhumik also needs to include a little equity in a systematic manner. In contrast to Anchal and Bhumik, the approach of Chandan is too aggressive. While he can afford the approach in early years of career, he should consider gradually having a mix of equity and debt in his portfolio. The trio may consider:
Anchal (mid-career, no active investments in equity) – Increase equity exposure
Anchal can afford higher equity exposure (e.g., 50-70%) for wealth creation. She may also include FDs.
Bhumik (near retirement, conservative investor) – Gradual equity exposure.
While Bhumik has been risk-averse, he should consider investing a small portion (10%) in equity-oriented funds and little more (10-15%) in balanced or hybrid funds for post-retirement income stability. He may gradually shift some of the fixed deposits, as they mature to some equity-oriented funds.
Chandan (early career, high equity exposure) – Diversify & reduce risk
While aggressive equity exposure is fine in early years, he should start including 20-30% in debt instruments for stability.
Be ready for exigencies
Apart from the suggested reorientation, Anchal, Bhumik and Chandan should keep about 6-7 months of their income in liquid funds for any exigencies. They should also consider taking medical and term insurances. Financial planning is much more than building wealth and includes being ready for exigencies.
Conclusion
It is important for the investors to achieve a balanced approach for long-term financial success. The final choice on the proportion to be invested in equity depends on the age, risk appetite, financial goals, and investment timeline. Neither complete reliance on FDs nor aggressive equity investing is ideal for long term success. A balanced approach, that includes both FDs and equities, can create a resilient corpus. While FDs provide ease of investing and safety, equities offer growth potential. By assessing personal risk tolerance, financial goals, and investment timeline, investors can have better portfolio to ensure financial security for creation of wealth.
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