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Here are a few things to remember as you go about investing this year

If I am asked to name three investment instruments that must figure in everybody’s portfolio this year, I would say — equities, equities and equities.

There’s no reiterating how significant this asset class has become over the past few years, especially with the debt market showing no sign of improvement and the returns on fixed income instruments almost at sub-inflation levels.

In fact, investors were facing a similar dilemma last year, too. Normally, both markets (equities and debt) are never at their extremities — there is ample room for valuations to move either way and hence ample opportunity to make money. The dilemma arose when the two markets took the opposite ends of the spectrum.

Such circumstances call for defensive investing. For diversification and spreading risk, one would be better off investing in a diversified equity fund than taking direct exposure to equity. Invest piecemeal, through the systematic investment plan (SIP) route, if required. Be ultra-conservative in your asset allocation to equity.

There are over 300 equity-oriented schemes operating in the market and the table shows some well-performing equity schemes. Of course, there are other plans whose performance has been good, but you need to be careful while choosing your equity scheme.

Also, note that the figures are returns per annum and not cumulative returns. For example, someone who had invested in Reliance Growth Fund 5 years ago would have earned 71.3% p.a every year for 5 years. In terms of numbers, an investment of Rs 50,000 would have grown to Rs 7.37 lakh over 5 years — no better example to showcase the magic of long-term investing!

But, this is not to suggest that one should pour all his savings into equity. That might be the worst mistake he could make. No matter how much the stock market beckons, one should try and maintain one’s asset allocation in tune with his risk profile at all times.

A simple rule of the thumb is that equity exposure should be around 100 minus one’s age. So if you are 35 years old, you should invest around 65% in equity, whereas if you are 60, the exposure should fall to around 40%. If you want to be more conservative, invest around 70% of the thumb rule result. As for fixed income needs, consider the following:

Senior citizens savings scheme (SCSS)
Apart from offering the Sec. 80C tax break up to Rs 1 lakh of investment, SCSS yields a return of 9% p.a. The interest is fully taxable. Thus, in the 30% tax bracket, the net rate works out to 6.17%. So, in effect, this instrument almost replaces the tax-free bonds, which used to yield 6.5%.

True, this scheme is only available to those who are 60 years or above or those who are retiring and 55 or above. However, routing funds through family members who are of an eligible age can be considered. There is no gift tax on funds gifted to relatives, hence the family as a whole can enjoy the higher rate from this strategy.

Post office monthly income scheme (POMIS)
At 8% p.a., with a 5% terminal bonus, the net rate of return here works out to 8.9% p.a. There is a cap of Rs 3 lakh on single accounts and Rs 6 lakh on joint accounts. Incidentally, the return on KVPs works out to 8.41% p.a. Though bank deposits currently yield marginally higher returns, SCSS and POMIS are considered safer on account of the implied sovereign guarantee.

The tax angle
Make your tax-saving investments. There is only one meaningful tax-saving avenue open — Sec. 80C. The much-touted and feared exempt-exempt taxed system of taxation is not introduced, meaning any investment made will be tax-free at the front end and the back end. Take advantage of it. Distribute your tax-saving investments between PPF and a tax-saving MF (ELSS), depending upon your age and risk profile.

To conclude
Rounding up the discussions we have had in this column over the past year, before undertaking your investments next year, keep the following in mind:

Be clear about your objectives
Know what you are investing in. Don’t take anyone’s word, especially that of the agent selling you the investment
Do not over-diversify and invest in too many stocks, MFs or any other investment instruments
Be patient. Timing the market is not as important as time in the market
Accept your temperament. If you can’t take the volatility in the stock market, there is no point losing your sleep over it irrespective of how much money there is to be made
Direct exposure to equity magnifies the risk, especially in an overheated market. Invest in stocks through MFs
Maintain your asset allocation pattern, no matter how much the equity market runs up or falls
Last but not the least, always invest for the long-term, for that is when the power of compounding really works. Getting in and out frequently takes away from the joys of the journey.

sandeep.shanbhag@gmail.com