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Web Exclusive: The right investment mix

Kripananda Chidambaram / Mumbai 07 Dec 12 | 09:34 AM

Your investments are like your financial diet, not very different from the regular diet that you consume. Just as your body needs a mix of cereal, pulses, fruits and vegetables, your finances need a good balance of assets to make it robust and useful.

Extreme positions of keeping everything in bank deposits or throwing all your money into equity are like eating only one type of food. Deposits ruin you by returning less than inflation in the long term. Equities can ruin you with their risk, especially in the short term.

What is the right proportion?

You could be forgiven for getting confused at the infinite literature that tries to deal with this balance. The jargon doesn’t help – ‘asset allocation’, ‘risk tolerance’, ‘volatility’, ‘investment horizon’, ‘investment objective’ and the like. And somehow, at the end of all this analysis, the products you are given turn out to be the same!

Let’s simplify this - your investment diet consists of only three types of items. Equity and real estate in India are similar in their long outlook, though they differ significantly in specifics. We bunch them as one. Here we mean real estate as an investment, not the house you live in.

Debt (deposits, bonds, post office, etc) is the second. For those more passionate about other interesting avenues, there is a third - ‘exotica’ like gold, art, international investing, etc. Most people can do very well with just the first two.

The only factor you need to consider while deciding the proportion between these two is how much time you have before you need the money.

Equity / real estate are really the only options for you in the long term (more than five years). They give better returns – in fact only they return enough to help you beat inflation. Fixed deposits, the favourite of many Indians, compare poorly and return lower than inflation. If your wealth is not keeping with rise in prices, the ‘safety’ argument of a deposit is irrelevant – the only thing you can safely say is that you are losing your wealth!

Deposits and other debt are useful in the short term because of their predictability. Whenever a commitment (house purchase, retirement, marriage) approaches, move that money into debt.


If you are more than a decade away from retirement, you can safely have two-third of your money in equity / real estate and the rest in debt. Closer to retirement, you can move it around so that only a tenth is in equity / real estate and the rest is in debt.

We will not go into the mathematics of this here. Suffice it to say that if you are young, your horizon can afford to be much longer. This makes equity / real estate the natural choice. The rest of the money in debt takes care of unforeseen situations and emergencies.

As you get older and need your wealth to give you steady income, you need to move into debt, so that there is stability. A small portion is still kept in equity to ensure that you don’t fall behind inflation in your returns.


The author is Director at Fintotal Insights and resources Pvt Ltd

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    07 Dec 12 at 11:32 AM
By: Investment Banker

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