Shun equity investments to your own peril

Are you scared of investing in equities thinking the current market scenario will erode your hard earned money? Such fears may be unfounded, for it is possible to protect your capital through a prudent mix of equity and debt investments.

Indeed, though the risk averse may be laughing their hearts out right now —- given the doldrums the equity markets are in —- not including equities in your portfolio may prove a far more risky decision as we move forward.

Let me give you a sample portfolio and demonstrate how you can invest a part of your money in equities, which will boost your overall returns.

Say you have a lump sum of Rs1 lakh to invest with a five-year time horizon. Taking advantage of the high interest rate scenario at present, you could invest 70%, or Rs70,000, in fixed income securities such as bank fixed deposit or debt schemes of mutual funds. You are likely to get about 9-9.5% on this investment.

The balance 30%, or Rs30,000, can be invested in good-quality stocks or equity mutual funds. One can expect equities to deliver a return of about 15% over a five-year period.

But even if this does not happen, do not fear, for you will not loose a penny of your capital, ie Rs1 lakh. The only loss, if at all, will be the potential interest you could have earned on Rs30,000.

The table below will help you understand what you can expect from your portfolio under different circumstances.

You will notice that your capital, ie Rs100,000, is safe as the Rs70,000 you have invested in debt has become Rs107,703. The balance amount you invested in equity has the potential to give the push in the total returns on your investments.

In case you do not wish to manage the investments yourself, you could opt for investing in monthly income plans (MIPs) offered by mutual funds, which have a debt: equity mandate of 70:30 or 80:20, as the case may be.

Other scenarios you might be interested to know:
If the value of equity investments remains the same after 5 years, then the effective return on your entire investment will be 6.60% p.a. compounded.

If the value of equity investments becomes half after 5 years, then the effective return on your entire investment will be 4.17% p.a. compounded.

The writer is a certified financial planner with Roongta Securities and can be reached at harsh@financialsuraksha.com