The Hindu Business Line : Go for the attack

To manage one’s financial balance sheet, it takes a good mix of both offensive as well as defensive strategies. Offensive strategies are designed to grow one’s assets while defensive play is utilised to protect the assets. The key is to follow a plan for employing these strategies, more importantly, the correct strategies.

Go for the offensive

Traditional ways to grow one’s assets have been to invest in stocks, fixed deposits, and the perennial favourite, gold.

Today, the world has changed. The investor has a variety of choices — ranging from equities, fixed income, enhanced returns on cash, alternative investments, commodities, international investments to hybrid solutions.

Equities: Typically, one can acquire equities in three ways. 1) Purchase individual stocks 2) Mutual Funds 3) Portfolio Management Scheme (PMS).

Purchasing individual stocks directly is viable if you can devote substantial time on research. If not, the more appropriate route for you to take is mutual funds. An alternative for the busy ones is to invest in a discretionary PMS. Here, you would let a portfolio manager take all decisions on portfolio construction and the ‘buy and sell’ decisions on your behalf.

Debt: You could buy debt in several different ways as well. If you understand the debt markets, have time to do research and have a large corpus that will allow you to get superior pricing on bonds, you could buy debt paper directly. In lieu of these mentioned factors, you could allocate a part of your assets in debt by buying debt mutual funds or a debt PMS. In a debt PMS, you not only benefit from interest income and capital appreciation but also potential trading profits.

Cash: Simple investment choices such as liquid funds are available. However, you could utilise techniques such as arbitrage to generate superior returns on your cash. Of course, you could lock your money up in fixed deposits as well.

Alternative Investments: If you are willing to lock in your funds for a few years, you could consider investing a part of your nest egg in Alternative Investments such as Real-Estate, Art, Private Equity, etc.

Real estate: You could participate in this asset class directly but it is difficult to spot Pan-India opportunities on your own. An easier way to participate in this asset class is through Real-Estate funds. Another way is through Real-Estate Investment Trusts (REITs) which are not available yet in India but are coming in the near future.

Art: Indian Art as an asset class has performed well in the past few years. As the disposable income of Indians rises in the coming years, this asset class may gain even greater prominence. You could buy art directly if you understand it, or through art funds.

Private Equity: This is an exciting new asset class that can yield handsome returns but is not for everyone. The typical minimum investment in a private equity fund is Rs 20 crore. However, recently, some funds have come out with a lower minimum threshold.

Hybrid Solutions: The term hybrid is derived from the composition of these instruments, which, typically, is a combination of debt as well as equity or equity-linked instruments. An example of a hybrid solution is Structured Products which can provide either a full or a partial guarantee of your capital while providing an opportunity to participate in the potential upside move in the stock markets.

International Investments: Every Indian is allowed to remit up to an equivalent of $2,00,000 abroad each fiscal year. This gives an opportunity for investors to diversify as well as participate in investment choices that are presently not available in India. Examples of such investment choices are hedge funds, REITs, annuities and fund of funds.

Take guard

Insurance: As you embark on the journey to accumulate wealth, it is equally important to protect your wealth. In the case of some untoward incident, be it death or disability, your next of kin should be provided for. You can ensure this by purchasing insurance.

Some examples of insurance solutions are Term plans, Unit Linked Plans (ULIPs), Child Plans, Health Plans, Endowment Policies, and General Insurance.

Hedging strategies: Even within your investment portfolio, if you want to protect your nest egg, there are a number of hedging strategies available which will insure that your portfolio stays immune even during volatile market conditions.

Trusts: There is no surer way to see your life’s savings dissipate than to have your family fight over it after you pass on. An effective way to prevent this is to form a trust that clearly defines who gets what after your demise. Trusts can also be used to provide bankruptcy protection.

Loans: As the saying goes, ‘there is good debt and bad debt’. Taking a home loan even when you can afford to pay for your home outright, in most cases, is a good decision.

There are two advantages to doing this. One, you can deduct the interest paid on the home loan from your taxable income, thus increasing your take-home pay. Second, you could invest your own money, potentially earning returns higher than the interest cost on the home loan.

Credit card debt, on the other hand, could be classified under ‘bad debt’. You cannot deduct these expenses and, at least in the Indian scenario, you could expect a small retailer to charge you 1-2 per cent more on your purchases.

Also, you would need to earn on your own money a return greater than the approximately 25 per cent that you pay to service credit card debt.

Therefore, in general, it is better to pay for your purchases with your own money rather than charging on a credit card.

Thus, if you want your financial life to be a success, apply both offensive as well as defensive strategies in tandem. By doing so, you will emerge with a winning combination.

(The author is Head, Wealth Management Solutions, ASK Wealth Advisors Pvt Ltd.)

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