May 27


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All investors have a very common question, “Which is the best asset class?” They are challenged to know where to put their money. Everyone wants to know which asset class will perform the best and help them meet their financial goals. So, today I am going to write about various asset classes and asset allocation for a salaried person.

There are only two major asset classes for all investors:-

  • Risk Free : Returns Equal to Govt Rates with assurance of returns.
  1. Bonds
  2. Bank FDs
  3. Govt Securities
  • Risky: Returns are Greater than Govt rates and the difference in returns is in proportion to the risk , with no assurance of returns.
  1. Gold
  2. Real Estate
  3. Equity
  4. Mutual Funds
  5. Plantation Schemes
  6. Chit Fund & Leasing
  7. Chain Schemes
  8. Debt return more than 16%

Traditionally, Indians are savers. Our savings rate is close to 30 percent. Yet,  majority of our savings go into risk free assets where the real returns are close to zero. Because they are so safe, the return on risk-free assets is very close to the current government securities interest rate.

Generally, the government keeps the risk free rate of return close to rate of inflation and therefore after taking into account inflation (rise in prices), the returns are very poor. And most of the risk free returns except for provident fund (PF) have a tax implication,too. Hence, the “close to zero” real returns. What this means is that if you have 100 today and plan to put it in a fixed deposit with a bank for 9 years, you shall get Rs200 in 2021. Let us assume you can buy a Kg of apples for Rs100 today , in 2021 due to price rise, you will barely be able to buy for Rs200 a Kg of apple. What has happened in effect with your Rs100 is that the goods you can purchase remains the same. So, even though your money has doubled, but so has the price of goods and services. As a result, you are just surviving. You do not have a surplus created.

In order to have a positive real rate of return (Risk free rate of return-rate of inflation), you will have to take some risk. The amount of risk you are willing to take for a higher return is a risk premium. If an investor wants to be rich, he or she has to take the path of risky assets. But it is important to strike a balance in how much risk to undertake.

The historical returns in each asset class in the last 26 years are given below:-

CATEGORY                            Yr 1986                                   Yr 2012                       CAGR

BSE SENSEX(level)                100                                         16,200                        21.6%
FLAT IN DELHI                         Rs 415,000                          Rs 50,000,000         20.24%
GOLD(1gm gold)                     Rs 142.41                             Rs 2791.05              12.12%
PPF                                             Rs 100                                  Rs 940                        9.00%

Stocks have outperformed other asset classes around the world historically as they are the only assets which denote a business which if selected properly will grow and be profitable. Rest all other assets are unproductive. Thus, they may temporarily beat equity markets but in the long run they will be behind shares and stocks. Yet only 3 percent of Indian population directly invests in stocks.

If you take the example of ‘faujis’ they also represent the Indian society. Maximum subscription is towards DSOPF and PPF. Then real estate, because each needs a house, and then come FD/Mutual Funds/Direct Equity.

The asset allocation for an investor should not be based on a scientific formula as propounded by a lot of portfolio managers. It should be on a case to case basis. A young second generation army officer whose father has just retired and who has no liabilities, should put maximum surplus investible savings into equity. Only when he marries, should he also allocate a portion towards debt i.e DSOPF/FDs and that too, a very small percentage. In case he plans to invest in a flat or real estate at an early age, he should only concentrate on two asset classes, equity and real estate (in the form of EMIs) or lumpsum depending on funds available.

Gold as an asset class, to my mind is a wasted opportunity. Its purpose is ornamental and was related to security in our parents times when gold was the best form of mortgageable security and had a universal standing. But today we are not in that state. Why should I take 12% returns when I can get 20% and above returns? I personally do not recommend investments in gold/gold ETFs. By all means, buy gold to make your spouse happy. If she is wearing it, then do not look at returns. Otherwise, do not buy gold biscuits, coins or gold ETFs as an investment vehicle.

My first and foremost advice to all investors is to make time bound financial goals for yourself. My recommended asset allocation to a new 22 yr old person who has got a job, a steady salary and another 30 years of working life would be to buy a term cover of sum assured Rs 1 cr for 40 years or 65 years of age whichever is later  as an additional insurance and then put balance 100% savings in equity/MFs for first 5 years. After marriage put 30% of your savings into PPF/DSOPF and 70% into equity or real estate(plot/flat) as you prefer. And take a relook at your allocation every 5 years to factor in the changes in your personal financial goals and your anticipated/current expenses.

If someone had invested in a Bank of India fixed deposit account in 2001, he would have got an 8 percent compounded return per year and would have multiplied his money 2.3 times if held till date. If the same person had invested an equivalent sum in Bank of India shares he  would have a whopping return of 3,300 percent as the stock rose from Rs12 to Rs410.

The only irony is that even though stock markets as a long term asset class have given the highest returns, most of the ‘faujis’ I have met have lost money in equities because they do not invest, they gamble and speculate. And remember the first rule of gambling—The Casino always wins. So, daily or short term trading in shares, futures and options causes maximum losses.

It is a garden out there. One has to know what one is doing. With knowledge, patience and discipline stock market investments can yield great returns to every investor. In my next series of blogs, I shall demystify stock markets for a beginner. Till then enjoy a fresh week of working with zest and enthusiasm.



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  1. I am actually thankful to the holder of this site who has shared this fantastic article at at
    this time.

    • Manisha on July 10, 2013 at 3:33 pm
    • Reply

    I need to create a diversified portfolio of at least 5 asset classes.
    Could you please help me by suggesting something along with a justification for investing in them?

    1. Dear Manisha
      My apologies for the delayed reply. The query you have raised is very pertinent. I think it calls for a complete blog. I am writing it for you. You can refer to it.

  2. My Friend, I read every word of what you wrote. Mostly I agree with your analysis of various investment routes and the CAGR. At the same time you have taken the example of the Bank of India FD vs the BOI Shares. Good point in itself. However, there were other banks too which went public and then they went kaput (as in BCCI). The main issue in the mind of a small investor is that mostly he understands little or nothing about stocks and hardly finds the time to monitor his portfolio. At the same time – in countries like ours where the entire economy is manipulated by the ruling Govt. which Investment Advisor knew in advance about the stock market crash or the Harshad Mehta scandal? If I am wrong, then think and tell me, “Is there any real good reason why our currency is being devalued against the $$ ? Or does the answer lie elsewhere?”

    1. Dear Gaurav,

      The issues raised by you are all valid.

      Yes, there were other banks too, BCCI for one, Global Trust Bank for another which went bust. I gave the example of Bank of India(BOI) because it is one of the public sector banks which “supposedly” are less riskier and safer than the private ones.

      Secondly, I now (having read Graham in the last few years) believe in only investing in debt free companies with lot of free cash flows. These companies have huge inherent advantages vis-a-vis “glamorous growth” stocks.

      Your point about common investor understanding very little of the markets, is bang on. This blog is basically to demystify and simplify a lot of those myths and jargon, propounded mainly through the TV channels because they have to 24/7 spew something. My attempt is to advise the investor on the slow and steady path of riches. Money making is never easy.

      Thirdly, nobody can predict bubbles and manias. No one can predict a Ketan Parikh or Harshad Mehta scandal. But what it can tell a wise and intelligent investor is that your business is overpriced. Please sell and sit aside. If I were growing apples in Kinnaur, and someone were to offer me Rs 1000 per kg of Royal Delicious Apples, I would be stupid not to sell the entire crop. But the percentage of people who would sell that entire crop would be miniscule because most of our financial decisions are not taken by analysing rational facts but by emotions — greed, fear, ego, overconfidence, social proof are some of the biases and emotions which make us take suicidal financial decisions.
      You may like to read, Charles Mackay’s book Extraordinary Popular Delusions and the Madness of Crowds and understand that these bubbles have happened earlier also and will keep happening in future too.

      Lastly, reasons for Rs devaluation. Ceteris Paribus , the value of Rupee is related to simple demand and supply. In the last month what has happened is the following:-

      (a) Govt Policy and Decision Making Paralysis leading to FIIs selling stocks.They sell in Rs and then buy dollars to take it abroad. So demand for dollars.

      (b) Indian GDP growth going down and down grading by Fitch & Moody’s leading to foreign capital turning back on India.Again take out dollars.

      (c) Crude Oil climbing higher, resulting in higher dollar payments by India.Oil companies rushing to buy dollars.

      (d) A negative spiral of Rs depreciating and Indian companies with foreign debt in the form of FCCBs scrambling to cover their losses by buying dollars in futures markets.

      Earlier whenever Rupee went down, RBI intervened by selling dollars out of our forex reserves. This time they are letting it stabilise first and intervening only selectively due to inflationary concerns.
      I hope I have been able to answer your queries.

    • BK Gupta on May 28, 2012 at 6:39 am
    • Reply

    Good one. Hope people will understand the demerits of safe investment, effect of inflation and risk involved in equity market and take a rational approach in their financial matters.
    Keep writing……

    1. Thanks a lot.

      • Yej on September 9, 2012 at 11:40 am
      • Reply

      Why the obsession with drinivg your Debt/Asset Ratio as low as possible? Before giving the “debt is bad, don’t have debt children, m’kay” lecture please let me say that without a mortgage, most people would never own a home and building wealth would be difficult. Mortgages are typically the only good debt people will have as it allows them leverage.I don’t have a problem with killing higher rate debt, typically in this low prime environment credit cards, LOCs, student & car loans. However, all debt should not be painted with the same brush. Having some good debt will help you create wealth and reach your financial goals.

        • Fauji on September 10, 2012 at 12:10 pm
        • Reply

        I have never said all debt is bad. Debt taken to create productive assets is good debt, eg home loans/mortgages. Debt taken for consumption is bad, eg cars, designer clothes, holidays.

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