Whether you are working or retired, your portfolio can maximum have 4 asset types – Equity, Bonds & Savings instruments which give interest on them, Real Estate assets that you can own and Commodities. The need to have several asset classes is predicated on the simple principle of diversification. Let us look at these in detail…
Assuming you plan to accumulate a corpus of Rs. 3 Crores over a period of time. The first thing that you have to decide is the amount to be saved for every month and then the compounded annual return that investment has to earn. e.g if you just decide that the return on investment for one full year is to be in the region of just 5%, even RD in a bank would suffice.
But if you want a higher rate of return, then investing in Equity is the only viable option. Of course, there are risks associated with it, but in life, you need to take risks to achieve your ambitions and goals. The need for equity is the same whether you are a working individual or a retiree. If you are a working individual, you need higher return to save less and spend more. As a retiree, the higher return will help you meet your ever increasing cost of living haunted by the spectrum of inflation. We would recommend an investment into Equity through structured savings in SIPs of such Equity oriented Mutual Funds.
On the other hand investment in real estate is met with many imponderables. The problem of associating your investment in real estate is being purely speculation driven, lumpy and illiquid. Moreover, real estate market crashes are also an important factor to contend with especially considering the fluid global economic scenario. It will also be hard to ensure that your property is well maintained if you move to another City or Country.
Your portfolio of investment should be based on the employment portability. If you are vulnerable to transfers frequently, then it will be in the fitness of things if your portfolio is in financial assets. But,the scenario changes if you are a retiree or approaching retirement.
There are several ways to earn return on your investment. You can even generate monthly income from bank deposits and life time annuities. Similarly, renting or leasing out your land and building will also yield you higher returns in the form of rent and security deposit keeping pace with inflation. Also, investment in commodities will also yield high returns. But the traditional norm and practice is to invest only in Gold and not on other commodities such as copper, zinc or crude oil.
Most of the Indians are literally obsessed with Gold and accumulate it mostly in the form of ornaments. But the point here is that these ornaments neither have a higher resale value nor do they generate income and are just kept as idle asset in your house safe lockers. Investing in financial gold (ETFs or gold funds) is also an excellent option. This too could be part of your portfolio.
But, during a financial crisis or unexpected extreme events and acts of god like situations of famine, drought, collapse of economy, any amount of our best investment plans can fail and mostly all asset classes typically crash. So, it is better for us to be aware of the need of diversification which will provide higher returns and various degrees of safely. Do not put all your eggs in one basket is what we would love to tell you…