One of the initial investment decisions that one has to make is what proportion of assets to invest in equities & what proportion in debt.
One of the basic thumb rules used over the years to decide on equity allocation is the 100 minus age allocation. The risk taking capacity of a person is maximum at a young age & keeps declining as the person gets older. Thus one should subtract the current age from 100 & invest that proportion in equities & the balance in debt.
This is just a basic thumb rule for guidance. It does not align with the financial goals of a person which are the actual purpose of creating a financial portfolio & building a corpus. Thus this rule may be a good starting point but various other factors like life expectancy, age of retirement, financial goals, other liabilities & risk profile of the investor should be considered before making the asset allocation decision.
Investment in equities can be done in various ways:
1. Invest directly into equities
2. Invest through an equity mutual fund ( again the fund can be diversified large cap focused, mid/small cap focused or sector focused & the risk-return will depend on the type of fund invested)
3. Invest in a Hybrid Mutual Fund (Balanced Fund/ MIP) which invests a proportion of your money into equities
Equity investments should always be made with a long term horizon of at least 5-10 years to mitigate risk. The short term fluctuations in the economy tend to even out in the long run & thus the higher the time period of holding the lower the risk. Also equity investments should be as diversified as possible not only across funds/stocks but also across time periods. As the saying goes ‘Never put all your eggs in one basket’. Thus one should ideally do a systematic monthly/quarterly investment in 4-5 mutual funds or 10-15 stocks or a combination of both and stay invested for more than 10 years.
One should always take specialized advice for building up your portfolio as per your profile & goals. Given a gradual increase in life expectancy globally over the years, investment in equities have gained importance to ensure that you get more out of your hard saved money and your money lasts longer than what it did previously.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’