I am 36 years old. I have Rs 50 lakh of cash liquidity to invest for a duration of 3 to 5 years. My target is to double this investment; Rs 50 lakh into Rs 100 lakh, I will need 20% of net average returns of four years. Am I right? Is this achievable? How must I distribute my money between equity and debt to achieve this?
Let me start off with some portfolio construction guidelines.
An asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) is ideal for investing towards one’s goal. While fixed income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run. Though equities have the potential to deliver superior inflation-adjusted returns compared to fixed-income, they are much more volatile and entail the risk of a capital loss over the short term. However, as the holding period increases, the risk of capital loss diminishes.
At the outset, it is crucial to have reasonable return estimates for the underlying asset classes when investing towards a goal. This helps to decide on the starting principal and/or contributions needed to be able to meet the desired goal with a reasonable degree of confidence. Over the long-term (10+ years), equity market returns are driven by inflation, total yield (payout and re-purchase), earnings growth and change in valuations. Equities can be expected to deliver around 4-5% above the long-run inflation rate. One should be cognizant of the valuations (forward-looking) as they play a crucial role while determining exposure to any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa.
Diversification is a key aspect while constructing a portfolio, as it cushions the portfolio against any adverse movements of a single security/asset class. One should be reasonably diversified across asset classes (equity, fixed-income, commodities), sectors, style (value/growth), funds and even fund houses. You should monitor your portfolio at appropriate intervals and re-balance the asset allocation back to the recommended allocation in case of any material drift due to subsequent market movement.
Suggestions for your portfolio.
Given the short horizon indicated by you, you should ideally invest with a portfolio mix of about 30% into equities and the balance into fixed-income instruments or debt funds to control portfolio risk.
- Equity- Large cap: 18%
- Equity - Mid cap: 4%
- Equity - International: 8%
- Debt: 70%
The international equity allocation offers diversification across geographies and acts as a hedge against rupee depreciation. The recommended allocation might provide you with 47% return (Rs 74 lakh) after 5 years, which is much lower than your desired goal of doubling (100% return) the existing corpus. The calculations assume equity market returns of 11% per annum and fixed income returns of 6.5% per annum. Even an equity-only portfolio (very high risk) would need an annual compounding of 15% to double the invested corpus in 5 years, which seems a tall ask.
In case you have no specific goal at the end of the 5 years, you could take a long-term view (10+ years) for wealth generation. You could then invest with a portfolio mix of about 85% into equities (Large/Mid/Small-cap/International – 55/10/5/15) and 15% into fixed-income funds. This could result in a portfolio value of Rs 1.34 cr at the end of 10 years, Rs 2.18 cr at the end of 15 years and Rs 3.57 cr at the end of 20 years. Your investment horizon should be a function of your goals (children’s education, retirement, foreign trip, etc.) in perspective.
It is recommended to have an emergency corpus in place worth at least 6 months of expenses, and a term plan and a health cover in place to safeguard your family against any untoward incident..
These are just broad suggestions. It would help to consult your financial adviser to help you make the right investment picks.
Articles authored by MOHASIN ATHANIKAR
Related Reading
Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
ASK MORNINGSTAR archives
