This post is inspired by one of the readers, Ms Manisha who sent in a query seeking my advice on five asset classes to invest in in order to diversify her portfolio.
I had written in one of my earlier blogs, “Which is the best asset class to invest in” that there are only two main classes. Risky and Risk Free and then I had given divisions in both of them. I guess it is time to probably ease out the decision making for my readers by suggesting a few classes suitable for every salaried or earning individual.The first principle of investment is safety of principal. A nice onomatopoiea. So, initially every individual should build a corpus of safe risk free instruments. My advice for a person earning more than Rs 3Lacs CTC would be the following:-
- Please make a regular investment in your PPF/DSOPF account . Rs 5000/- per month or more, till its maximum limit. Leave this investment untouched till your retirement. Compounding will take care of growth towards the later years.
DO NOT be tempted to withdraw this amount or think it is too little. For the first 20 years it will appear to be too little, just trotting along. But in the next 20 years it will start galloping, like a race horse. This is your first asset class, Manisha. - Simultaneously, invest Rs 5000 per month in PPFAS Long Term Value Fund. It is a mutual fund for the long term. Invest in it in lumpsum NOW as the NAV is close to issue price. Just about Rs10.10 or thereabouts. This investment if kept for 20 years or so should give you atleast 1.5 times the PPF returns. It could even give you more than that.
But being a hard core conservative when it comes to personal finance, I shun risky projections. 12 to 13% tax freereturn is also very good. Generally a good mutual fund gives you upwards of 15%. But I do not want you to predicate your earnings on 15%. Take it as a bonus. Your happiness will be higher, if you think you will get Rs 1 million and suddenly you find that instead of 1 million you are getting 1.5 million. Ultimately we all are working and living to be happy. Being rich is incidental. - Gold is an excellent hedge against currency movements and recessions. But I do not advise investment in it in large quantity. Because in India, gold is gifted to every daughter/daughter-in-law by parents, in-laws, husbands and relations.
So, that jewellery/gift keeps lying in lockers and keeps growing as we never sell it. Just keep your gold limited to that. If you have zilch gold with you and you are really very keen, then and only then, invest about Rs 1Lakh in a gold ETF. Quantum Gold ETF is a good bet. - The fourth asset class would be a plot of land or a flat, depending on your funds. A plot appreciates higher and faster than a flat. But a flat gives a constant cash flow and a rental which can take care of the mortgage payments/loan payments.
So, the choice will depend on your cash flows. - The fifth asset would be a gradual build up of high quality debt free, cash rich companies with wide moats around them in your equity portfolio.
Very easy to write but very difficult to identify. In my earlier blog posts, I have mentioned a few of them. You could pick them up if they are still available cheap. Gujarat Gas comes immediately to mind at current price of sub Rs200/- per share.
I am going to introduce a new “BEST BUY” kind of recommendation of a share of a company which I feel could be worth buying with due analysis and diligence. I have almost daily someone dropping in to seek advice on issues related to personal finance. May god grant me the wisdom and means to help them with correct and sound advice. Amen.
In response to your comment on PPFAS long term value fund-
You have suggested to buy it lumpsum now as “NAV is close to issue price”.
I think that you have momentarily confused mutual funs with individual stock. A low NAV or high NAV mutual fund does not imply that one is cheaper than the other.
Thanks,
kuntal.
Dear Kuntal
A very good comment. Yes I understand a mutual fund unit is not like a stock. When I say it is close to issue price, I meant you are getting something worth more than Rs 10 at Rs 10 in other words, something worth a lot in future is available to you at a very reasonable price. The NAV may further go down a bit but once the markets turn and which they will, at that time you would be buying the same units for more than Rs 10/- or 11/- . It is just a coincidence that this Mutual Fund has come at a time when the markets are in a dump and it is getting into excellent stocks at very good prices. Hence, my conviction. Yes SIP is always a good option but at times like the present ones, lumpsum investments may fetch you better long term returns.
It is good to respond to readers who understand. Your comment is well appreciated
Thanks
@ Fauji,
I had a suggestion:
Instead of contributing to PPF monthly, it would be better if total yearly contribution
were to be deposited as lumpsum between April 1-5 every year.
Suppose one has 60,000 to invest in a year.
Assuming 8.6% interest;
Scenario A: 5000 is invested monthly ie 5000*12- Here, amount after 1 year is 62795.
Scenario B: 60000 is invested as lumpsum between April 1-5- Here, amount after 1 year is 65160.
So difference of 2365 in 1st year itself.
Thanks,
Kuntal.
Yeah perfect. Only catch is a lot of us do not have lumpsum 100k to invest in the beginning of FY. Your suggestion is otherwise ideal.
@ Fauji,
In that case, a good thing to do would be to do 1 year recurring deposit which matures every March.
The accumulated amount can be deposited as lumpsum between April 1-5 every year. And start a new RD.
How does this sound? I do this personally.
Thanks,
Kuntal.
Hi Kuntal,
That is a suboptimal strategy when compared to monthly subscription to PPF. Because RD post tax gives lesser returns than a PPF. So a lumpsum investment in PPF in April makes sense only when you suddenly get a bonus or inflow of cash. Otherwise continue with monthly PPF deposits. Deposit them by 5th of every month. that is better than putting in a RD and then transferring to PPF.