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Rupees & sense
Add wealth creation to your "to do" list
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Despite all the eulogies paid to women ("better halves" for one!), a vital activity like wealth creation continues to be male bastion. Strangely, wealth creation is an activity which rarely features on a woman's "to do" list. We believe this mind-set needs to change and change rapidly. Whether you are a working woman or a home-maker, whether you are a part of a family or a single woman, wealth creation is an activity you should be proactively pursuing.
Proper planning coupled with sound advice can ensure that wealth creation is well within everyone's reach. In this article, we will deal with asset allocation.  Asset allocation, in simple words, is the process of building a portfolio of assets like equities, fixed income instruments, gold and property, among others in line with your risk appetite, to help you achieve your objectives. Investing in various asset classes provides investors the benefits of diversification. As always, the asset allocation needs to be in line with the investor's risk appetite and her investment objective.
Let us take an example to explain the same. Miss Puja is a 27-yr old single woman who has no immediate liabilities to provide for. With age on her side and a reasonably high appetite for taking on risk, equities and equity-related instruments could occupy a substantial portion of the portfolio. On the other hand, we have Miss Jaya who is also 27 years of age, single and with no liabilities on hand; however the differentiating factor is the risk appetite i.e. she has a lower risk appetite. In such a scenario, despite the seemingly similar profiles, Miss Jaya's asset allocation would be quite different from that of Miss Puja. Table 1 shows possible asset allocations for both Miss Puja and Miss Jaya.
Miss Puja vs. Miss Jaya
| Assets |
Miss Puja |
Miss Jaya |
| Equities / Equity based investments |
45% |
30% |
| Fixed income instruments |
5% |
10% |
| Gold |
5% |
5% |
| Property |
40% |
50% |
| Cash |
5% |
5% |
As can be seen above, on account of Miss Jaya's relatively lower risk appetite, the equity component in her portfolio is far lower as compared to that of Miss Puja. Instead fixed income instruments occupy a larger chunk of the allocation. Readers would do well to note that the examples above are purely for an explanatory purpose. The investment advisor has a very significant role to play in aiding investors get the right asset allocation i.e. he should structure the portfolio based on the unique dynamics for each individual. Further active monitoring is a key factor as well.
Another point to be noted is that the asset allocation undergoes change with passage of time as some of the objectives are achieved and new ones are set. In our case, Miss Puja who was a risk-taker could, a few years later (say at the age of 50 years), have a reasonably different allocation. At that age she is married and has added responsibilities in terms of a family and children. The same in turn could translate into a need for less risky and more stable investments.
Miss Puja at 50 years of age
| Assets |
Miss Puja |
| Equities / Equity based investments |
20% |
| Fixed income instruments |
25% |
| Gold |
5% |
| Property |
40% |
| Cash |
10% |
As can be seen from table 2 above, the allocations in equities have been toned down and instead a higher portion is held in fixed income instruments and cash. Now let's take a closer look at some of the areas where investors can invest their money and try to understand the nuances involved therein as well.
- Equities
Equities are often regarded as the best performing asset class vis-â-vis its peers over longer time frames (i.e. more than 3 years). Also much has been written about how they are best equipped to counter inflation. However equity-oriented investments are also capable of exposing investors to the highest degree of volatility and risk. Further more, successful participation in the equities segment is no cakewalk. There are a number of factors which affect the performance of equities and, studying and understanding all of them on an ongoing basis, is something most retail investors are incapable of doing.
Instead the mutual funds route is a far more convenient and feasible method to access the equity markets. Among others, mutual funds offer the benefits of diversification and expert services of a fund manager. The investment advisor has to perform an important role in helping investors select the right schemes, monitoring their performance and ensuring that investors make timely investment decisions.
Another option available to investors is ULIPs (Unit Linked Insurance Plans); ULIPs combine the benefits of insurance and investments in a single avenue. Unlike conventional insurance products (endowment plans), ULIPs offer investors the choice to decide the asset classes wherein their money will be invested, i.e. they can choose between various combinations equity-debt. On a flip side, investors need to be well-informed of the charges levied on their investments. While initially charges tend to be high (a fact that unscrupulous agents do not disclose), over the life of the policy they tend to even out to reasonable levels.
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