The Hindu Business Line : Portfolio mix

Bank deposits are safe. As safe as a bank is the obvious dictum. They offer liquidity. And today they give you 10 per cent interest. Under the inflation rate for sure, but that’s an aberration.

Then there are the fixed maturity plans from mutual funds. More tax-efficient than banks because they are listed in the stock exchange they also offer up to 12 per cent return. For sure, better than the bank.

The public provident fund is by far the best pick under the Section 80 C scheme. It gives you tax rebate and so, to that extent, axes taxes. Of later, there have been questions on how safe are provident funds are, but remember they are backed by the government. If the country’s finances go kaput then no investment is worth it!

Savings account is a slot where you need to park some money. After all, you will require money at call or at short notice. No one can forget gold. The yellow metal’s steady performance and its record of being man’s best friend in moments of calamity makes it a needed pick in any portfolio.

Equity, with its heady prospects of giving out attractive returns, should be the pick of the pack. History records that India’s Sensex has given an average return of 16 per cent per annum across the last 17 years.

That is impressive by any standards, considering that Sensex represents equity as a class and does away with issues like being able to pick good stocks at the right time. What it implies is that if you invested in the Sensex, each month, month on month during the 204 months (17 years), you would have earned 16 per cent per annum compounded.

If you fight shy of investing in equity because you either don’t have the expertise, time or inclination to do so but still believe in the equity story, you have mutual funds of the growth variety to fall back upon.

While these will form part of your portfolio, there are two more you cannot afford to forget.

The first is property. Once upon a time, people invested in just one house. They looked at it as an emotional investment. With growing disposable income, that practice has changed. People are buying houses early and they are buying more. Property prices too are shooting rapidly. Every portfolio should overtime have an exposure to real estate. Real estate mutual funds (REIT) are also on the way.

The next one is not an investment but should form part of your repertoire of choices — Life Insurance. Every young man and woman should buy insurance for an amount that will help the heirs maintain the present standard of living should something unfortunate happen to the bread winner.

Of course, as you grow older or progress in your career, your assets increase and your needs decrease. So it is quite possible that a time would arise when you would no longer need to insure. That’s the time when you should get out of it.

And may be, over time, you should also look at international investments.

The accompanying table gives a broad indication of a portfolio mix for people in different age groups.

Financial prescription, like medical prescription, must be tailored to the individual’s temperament and needs. But this can be a good starting point. By setting up a portfolio, you can cut risk and look forward to healthy returns.

(The writer is a Chennai-based chartered accountant.)

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