My current Asset allocation and investments

One of the questions I get asked most is the kind of asset allocation I follow and what are the current investments I am having. While readers of my blog will understand my openness in sharing a lot of personal details, I am obviously a bit uncomfortable in sharing the direct monetary figures of this. At the same time, I do want to share as much information as possible in the blog as I know many people benefit from the same.

I have therefore come up with an idea of Financial Independence Units, where each FIU has a certain value, suppose it is X. Now if I say my net worth is 100X, then it will not reveal my real net worth for you do not know X. Yet, you will be able to understand my asset allocation and the relative investment figures that are currently there.

So, with that background, let me give you the total asset base as of last Friday, 28th September and the asset allocation thereof. Note that I mainly invest in Equity ( both stocks and MF ) and Debt. There is some Real estate I have in terms of a flat in Chennai but I do not have much plans to sell it right now. Ok, the asset allocation and breakup are as follows:-

  • Total asset base is 100X
    • Equity allocation is 41X
      • Stock allocation is 21X
      • MF allocation is 20X
    • Debt allocation is 34X
      • PPF allocation is 9X
      • FMP allocation is 10X
      • Fixed income allocation is 9X
      • Hybrid allocation is 6X
    • Real estate current value is 20X
    • Insurance allocation is 5X

Note that this is my current asset allocation and it was obviously a fair deal more before the current drop in the markets. In terms of general asset allocation principle, with the real estate and insurance out of the equation, I normally try to maintain a 60:40 ratio between equity and debt. Right now this ratio is more like 54:46 and therefore I am looking at investing more in stocks over the next 2 months or so.

The other question most people ask me is where do I get my passive income from. As of now it comes from the following sources:-

  • Fixed income allocation gives me a certain amount through interest earnings.
  • Dividend from some equity MF schemes.
  • Dividend from Stocks.
  • Capital gains from FMP redemptions.
  • Capital gains from any hybrid fund redemption.

I can also withdraw from my PPF account but I have never done it so far in my life and do not anticipate doing it for another 6 years at least.

All this basically means that my PPF will be useful for me in the age band 60-70 and beyond 70 I will be using my equity assets for the rest of my life span.

My investment strategies for the last quarter

A lot of investors are a worried lot looking at the market performance in September. It has been exceptionally poor and completely contrary to what most experts thought will happen. I had thought that after the smart recovery in August, September will be similar performance though a little muted. In reality, the market has tanked quite a bit and as of now does seem to be in a strong bear grip.

I think the next quarter is going to be a challenge in terms of the markets and unless there is some very good news on the economic or political front, I do not see any good recovery happening. Specific to the Nifty, the resistance level of 11150 is very strong and the support level of 10800 or so is not so. As such it is quite easy for it to slip down to lower levels and even breach 10500 easily. As far as my own portfolio goes, it has taken a big hit recently, going down by 15 % over the last month or so. Given that my portfolio in both stocks and MF is substantial, the absolute level of loss is a staggering one. However, given the fact that I do not need to redeem any of these investments in the next few years, I am not too worried about the impact on my net worth just yet.

So the key question for me is how do I plan to change my investment strategies for the next quarter. As I see it, despite the ongoing mayhem expected to continue, this is a real good time to invest in quality stocks. This is also supported strongly by the asset allocation principles, where you need to move some money from debt to equity. With this broad strategy as the base, here are the actions I will take.

  • Look at investing in Mid cap and Small cap MF only for the next quarter out of my active income surplus. I think these make more sense as compared to large cap or multi cap MF right now.
  • So far I was using any FMP redemption this way – use the capital gains for my regular expenditure and reinvest the Principal amount into some other FMP or Debt fund. In the changed situation, I will invest the principal amount into stocks or some close ended MF that seems potentially good to me.
  • Any other income such as interest from tax free bonds, dividends from MF schemes, dividends from stocks etc will be used to make selective purchases into my stock portfolio. There are a lot of stocks available at very attractive prices and it will really make sense to take advantage of these over the next few months.

In short, though it is a tad painful to see a lot of red in my portfolio over the last 2 months, I am rather optimistic and excited about the opportunity presented by the current markets. As I do not have to depend on my earnings from here in the short term or medium term, I believe I have time on my side. The key attribute will be to identify good companies that will hopefully stand the test of time, at least the next decade !!

As an investor, you too should look at your situation and figure out how you want to get things done. Whatever your strategy is, keep asset allocation in mind and take advantage of the current and future market levels. For the markets, things will definitely get far worse before they get better – but that is also an opportunity that you must seize.

Asset allocation is critical for all investors now

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 11800 levels by end of this month. However, beyond that or even before there is every likelihood of a correction to 11000 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future, unless there is a change of power at the centre.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.

The reality of any bull market is that there will be intermediate cuts – some not so deep and the others fairly deep. At such points you have opportunity to add more to your portfolio in a productive manner, as long as you have cash to do so. Being conscious of asset allocation and having a strategy for the same allows you to do just that.

Debt investments – why, where and how

I have been away to my home town for for 2 weeks on and managed to club my daughter’s convocation as well as a trip to Ajodhya hills in Purulia during this time. Was not able to write my blog in this period and saw that quite a few readers had put their queries on Debt investments. So in this first post after the break, let me try to address this issue in a comprehensive manner.

To begin with, do you need debt at all? If the annualised returns from equity investments are in the range of 12 % and more and you are struggling to get even 7-8 % in Debt investments, then why do you really need to invest in it? Well, the most important reason is that your investment growth with equity normally follows a rather tortuous path. Think of a situation where all your money is in equity and there is a market crash, which reduces your portfolio value by 30-40 % and it takes a long time to recover. In this period you may well have goals coming up such as children’s education etc which cannot be postponed. In such a scenario you will be forced to sell your equity investments at the wrong time. Not only will this have a significant negative impact on the growth but there is also a serious opportunity cost involved. Let me try to explain this with an example :-

  • Let us assume I was preparing for my son’s admission into a B school in 2019 and was planning for a portfolio of 22 lacs for the same. I had been doing SIP into 2-3 MF schemes for a long time to achieve this.
  • Due to the upsurge in our markets in Jan 2018, the portfolio value had already reached 21 lacs and I was sure that the portfolio will be well above this figure in 2019 March, when I need the money.
  • Unfortunately, the market corrected a fair amount already and let me assume that it will correct to -30 % till March 2019. 
  • My portfolio value will suddenly be 15 lacs only and I need 7 lacs from elsewhere.
  • I have 100 lacs in my retirement portfolio and was hoping it will increase to 200 lacs in 6 years @ 12 % annual returns. Wanted to retire in 2024.
  • Due to the market downturn, my portfolio for retirement became only 70 lacs by March 2019. On top of it, I also had to take 7 lacs out of it. My retirement portfolio then reduces to only 63 lacs in March 2019.
  • Even with a 12 % return now I will never get back to 200 lacs or anywhere close in my retirement – in fact I will have only about 120 lacs.

In case you are thinking that such things cannot happen, let me tell you from personal experience that such occurrences may well happen for 3-4 times in a 30 year period for which many of us normally invest. I myself have gone through 3 such experiences in 2001, 2008 and 2011 which created quite some difficulty for my plans. Fortunately, my asset allocation had the cushion of debt investments and I also did not need the money for any of my goals.

Well, I hope it is now clear as to why you need Debt investments as part of your portfolio. The issue now is where do you invest it and how. As I have covered it in other posts of my blog, I am only presenting the solution here, rather than giving a full explanation.

  • For all salaried people, PF is a must and you need to make sure that you do not withdraw from it. Keep it only for your retirement.
  • For all others a PPF account is a must. In fact, I will say the salaried people should have one too and others can have one for their spouse as well.
  • If you have a daughter then you can go for SSY as well.
  • Retired people or ones looking at regular income can look at Tax Free Bonds and Senior Citizen’s Savings Scheme along with Vaya Vandana Yojana.
  • Others can look at short term debt funds and also Hybrid type funds such as MIP and Equity Savings Funds.
  • Finally, you can look at long term Gilt funds if your time horizon is really long.

What about the asset allocation? Well, if you are working with an active income you can keep Debt to Equity at 35:65. For people in the FI state it can be 45:55, for retired people 55:45 and for senior citizens above 70 it should be 70:30. Remember that you will definitely need both equity and debt at all stages of your life, unless you have way more assets than you will ever need.

Whichever way you look at it, Debt investments are critical to your financial well being.

At current market levels Asset allocation is an imperative

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 10800 levels by end of this month. However, beyond that or even before there is every likelihood of a correction to 9500 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.

The reality of any bull market is that there will be intermediate cuts – some not so deep and the others fairly deep. At such points you have opportunity to add more to your portfolio in a productive manner, as long as you have cash to do so. Being conscious of asset allocation and having a strategy for the same allows you to do just that.

In current markets you must follow asset allocation

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 10300 levels by next month. However, beyond that there is every likelihood of a correction to 9500 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.

My cash flows and investments in April

April has been a good month for our markets with all the major indices hitting a lifetime high. My Stock and MF portfolio have done rather well and while I am not one to keep looking at my net worth every day, it does feel good to see it grow well in this month. For all people with an asset allocation strategy in place, this will be a good time to shift some money to debt. However, the question is which debt instruments will really work out in the current situation, where the interest rates are probably bottoming out?

I think it will be a good idea to outline my own situation in terms of the cash flows in April and how I have invested them in the month. These situations and decisions are unique to me but it can be definitely useful learning to some of the readers. Let me start with the cash inflow first. The month of April had significant cash inflows for me from the sources given below:-

  • My active Management consultancy income from the software company where I work currently as Chief Strategy Officer.
  • Some consultancy income from a couple of holistic life plans I have made for 2 people who had reached out to me.
  • Rent from my Chennai apartment which largely goes into paying for our current apartment in Hyderabad.
  • Interest income from tax free bonds
  • Dividend income from stocks in my portfolio
  • Dividend income from some MF schemes in my portfolio
  • Redemption proceeds of some FMP schemes on their maturity

My regular expenses that require cash outflow are as follows:-

  • Household expenses including rent for our apartment.
  • Amount sent to my parents every month for supplementing their income.
  • Expenses incurred on my children, separate from their college fees.
  • Any discretionary expenses including travel, entertainment and gifts.
  • Contribution to 2 charities of our choice.

As of now my passive income is enough to meet the above expenses in an ongoing manner and therefore my active income is almost totally invested. Besides for the FMP redemption proceeds, I invest the principal and use the capital gains as part of passive income. In April, the FMP redemption principal was to the tune of 11 lacs and this needed me to decide where should I put it back.

The investments I have done in April are as follows:-

  • PPF contribution to the maximum for my wife and me.
  • FMP plans from Reliance, Sundaram and BSL.
  • MIP from BSL
  • ICICI Value Fund series 12
  • Sundaram Micro cap fund series 11

Why have I invested in the following and will I be doing the same in May? The answer to the second part is no, as I look into each month separately now, keeping the overall asset allocation in mind. 

The first part has a more complex answer and I will try to provide it in the next post.