Vishwanathan Meghanathan

You are right in spreading your investments across various types of assets- fixed return investments, stocks, insurance and real estate. Each of these asset classes swings to different boom-bust cycles.

For instance, stock prices may be in the doldrums when real estate prices are rising, and the stock markets may be booming when real estate is in a slump.

A diversified portfolio will ensure that your savings are not unduly exposed to cyclical swings in any one of your investments. However, your financial plan will be more effective if you distribute your investments between different types of assets after formulating a good asset allocation plan.

This will need to be formulated by a financial adviser on the basis of your age, earning/saving capacity and risk profile. Based on the savings and income profile that you have made available, we suggest the following:

Your portfolio has a substantial allocation to equity.

If you continue to follow your indicated savings pattern over the next five years, you would have invested roughly 55 per cent of your portfolio (at cost) in stocks and equity mutual funds, about 12 per cent in chits, but only 25 per cent of your investments in fixed return investments such as the PPF and POMIS.

A 55 per cent exposure to stocks in your portfolio may be acceptable if you are in your 20s and 30s and will not mind losing a big part of your savings in the short term to swings in the stock market.

But if you are not comfortable with volatility and are not prepared for a long (5-10 year) wait, then you should trim your equity investments and step up your investments in debt or fixed return investments.

Please do not invest any part of your savings that you will absolutely require in the next three years, in stocks or equity mutual funds.

In our opinion, chits do not offer a particularly safe or high-return avenue for your investments.

You should instead consider investing this sum in government fixed-return schemes such as the NSC and POMIS. If you prefer a shorter lock-in, consider one-year fixed deposits from reputed companies.

If you require the money to be available to you on tap, park it in a liquid mutual fund.

Make sure that you have a term insurance policy, which covers you for at least 8-10 times your annual pay. If you are uncomfortable with committing yourself to a unit-linked plan for the next five or ten years, stay away from them.

Instead, consider investing systematically in a good equity fund. This will give you the flexibility of withdrawing your savings, at a time of your choice. Given their low cost structure, equity funds may also be better placed to deliver a reasonable nest egg over a 10 to15-year period to meet your children's education expenses.

Though investing in real estate does appear to be a good idea from a portfolio perspective, we are unable to offer comments on where you should invest, given our lack of expertise in this area.

Bullion has generated impressive returns over the past couple of years; but remember that it turned in extremely poor returns in the ten years before that!

In fact, gold prices, until 2002 did not even keep up with inflation.

Investing in any commodity, including bullion, calls for specialised knowledge, close tracking and a good sense of timing, as commodity prices are usually much more volatile than stock prices. We would not recommend it for the lay investor. But if you are determined to invest in bullion, buy pure gold bars from a bank, instead of jewellery, as the latter may not fetch you full value at the time of resale.

Ten is a large number of equity funds to hold in your portfolio.

Holding a large number of funds makes it difficult to track the portfolio and also adds to your paperwork.

Streamline your portfolio and hold just three equity funds, which you add to regularly.

(Queries may be e-mailed to mf@thehindu.co.in. or sent by post to Business Line, 859/860, Anna Salai, Chennai 600002.

Aarati Krishnan

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