Keeping idle savings is the surest way to financial ruin despite prudent intentions. Therefore, one has to invest, since inflation is the invisible enemy one has to vanquish. All of us have to channelise our savings into instruments that could give us returns in all seasons.
Investing in one asset class is never advised since one particular asset class can perform very well in a certain period of time but no asset can provide returns all the time year after year. This is a cardinal rule of investing. Let’s examine the rules in some detail.
Spread over 3-4 asset classes
Choosing asset classes to invest in is the first fundamental rule of investing. Taking the current bull run in the Indian markets as a context, investment advisor Nilanjan Dey asserts despite the excellent returns over the past 3 years, one should never put all his/her money into equity.
“One should consider investing in 3 to 4 types of assets. These can be equity and equity-related instruments such as mutual funds, debt, gold and even real estate. Only a healthy mix can ensure significant returns in all financial climates,” Dey, director of Wishlist Capital told News9live.
One goes down, another goes up
The logic is simple: when one asset class goes down, others would keep performing. When the equity markets keep performing, stocks and mutual funds would give generous returns. Debt instruments might not be very high, but they won’t fluctuate with time and provide predictable base to your portfolio.
Also when the equity markets go down, usually gold flourishes. Gold is valued for centuries as as a hedge against inflation. But one has to invest in paper gold such as gold ETF (exchange traded funds) or gold coins or bars. If you buy jewellery, you will get a far lesser value when you go to sell it since manufacturing cost will be deducted.
Break the links
The above rule also has an implicit sub-rule. And that is, these assets must not be linked to each other. If they are linked, they would go up and down simultaneously, negating the all-weather-returns strategy. If all the money is in debt, an upsurge in equity would prevent the benefits from reaching you.
Asset allocation is a tricky business. It consists of a few rules that must be followed to overcome temptations from one particular class. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
