How to allocate assets and get RICH

 Whatever asset allocation you choose, if it keeps you awake (and your planner too) at 3 a.m., it is not a good equation that you have got. Set it right soon.

When three of my clients came to see me for a portfolio review, I realised what a difficult job I had on my hands. Dilip, Devrajan and Kavya, the very convenient names of my three clients had such different but risky portfolios that my work was cut out.

Dilip had a portfolio of Rs 6 crore (market value had cost him Rs 3.6 crore about three years ago) in two properties in Mumbai. Both were funded by loans (amounting to Rs 3 crore). Both the properties were given on rent, and luckily for him the current rent was greater than the EMI (equated monthly installment). This was, of course, because the EMI was for a period of 20 years, and Dilip was sure as the rents went up, the situation will only look better.

Devrajan had come to me in 1999 and even though he was in a brokerage firm and had some ESOPs (Employee Stock Ownership Plan) in that company, his portfolio was completely in the debt market -- Reserve Bank of India bonds, income funds, and bank fixed deposits. Out of a portfolio of Rs 4.5 crore, he had Rs 20 lakh in equities -- held without much conviction. He felt equities was too risky.

Kavya was the flamboyant type, who had worked in a pharmaceutical company, had no savings, no investments, and a kingly bank balance of Rs 340,000 all in the savings bank account.

The savings were all in National Savings Certificate, Life Insurance Corporation policies, Public Provident Fund, own Provident Fund -- all done to save tax. However, when she met me in 1999, I introduced her to equities.

I now had the enormous task of making a concept called 'asset allocation' and risk protection for these three.

Dilip, for example had no liquid cash and the only asset other than the two flats, was a small LIC policy, and some cash balance in his savings account. He is a senior manager at a business process outsourcing (BPO) unit, has a Rs 45 lakh job, is 40 years old and has two grown up children.

His wife runs a boutique that makes no money. I convinced him that he needs Rs 6 crore insurance cover, and he should do a systematic investment planning (SIP) in an equity fund from the rent that he receives.

Dev, luckily, had started an SIP in 1999 in equity funds, and now was happy that he asked me to review his portfolio in 1999. A very strong believer in financial planning, he was convinced he could do it himself.

I just highlighted the risk of inflation and putting all money in one asset class. He now had about 20 per cent of his portfolio in excellent equity funds, which had also given him some sensational returns. He had also converted some of his income funds into equity funds, and was beaming and happy.

Kavya was my biggest problem -- she thought I was a magician and I had created the returns for her. She started calling me her lucky charm -- and would introduce me as a 'luck charm' to her colleagues. Now, she is such a convert that she thinks all moneys should only be in equities.

There is a human tendency to think that the immediate future will be same as the immediate past. Though empirically, this is never true in our lives, we do not accept that. Not carrying an umbrella today, because it did not rain yesterday is perhaps the best way to get drenched. Is it not?   Read more

Tags: asset allocation, portfolio, risky, loan, home loan, RBI Bonds, ESOP, fund loans, properties, rent, EMI, NSC, life insurance, PPF, PF, tax, SIP, equity funds, financial planning, assets, good returns, equities