How much should you invest in equity?

People often ask how much they should invest in equity? The rule of thumb says that the percentage of funds that should go towards equity investment is 100 minus your age. If you are 35 years old, you should invest 65% of your money in equity. I would suggest not following this rule of thumb blindly, unless you are a millennial investor. For investors of that age, it is most likely that the investment would be minimal.

For equity investment it is important to focus on the objective and do a holistic financial planning. This will take care of your financial goals, risk profile, expectation of returns and returns you are supposed to earn, etc. These factors will help you device the best asset allocation strategy that will work under all circumstances, without depending on the vagaries of the equity market.

The comprehensive financial planning exercise will also tell you whether you are indeed equipped to handle the inherent risk associated with stock market investments. Since market has an inherent tendency to remain volatile, you should be immune to the anxiety or pains of your investments going down in the short term.

You must have heard about the Sensex delivering returns to the extent of 390 times in its 39 years of journey. That is a whopping 16% plus return on an annual basis. If the market has given phenomenal returns then why aren't people making similar returns? Remember, this kind of return can be made only if you remain invested for a long time. But not many will like to stay invested for 39 years.

In fact, you may not need to invest for that long, provided you do well in your career and make good money and use the multiplier effect of growing that money. But investors will need to stay invested for at least 20 to 25 years or longer. This, in turn, depends on your current age and financial goals. Staying invested for long doesn't mean investing in few funds. That is where financial planning review and regular monitoring of portfolio will help.

Let us assume you are 28 years and have immediate financial needs in the short-term such as marriage, higher education, etc. You can't follow the rule of reducing age minus 100. Instead, you should plan your finances in such a way that your equity allocation grows as and when you keep meeting your short-term financial goals. For your long-term goals, such as retirement planning or children's education or marriage, allocate a higher percentage of your savings towards equities, because these goals have more time.

The writer is chief gardener, at Money Plant Consultancy