Asset Allocation – By Returns, Age or CRATON?

Having spent 3 decades in financial industry, I still face the same queries which I used to face back in 1990s or early 2000.

• I am 35 years old and have 50,000 per month to invest. Which are the best mutual funds to invest?
• I am 23 Years old. Can I invest my monthly surplus in equity mutual funds?
• I want to invest 20,000 per month. Which is the best instrument to invest?
• Which is the best Retirement Plan? How much are the returns?

Products keep changing but the word ‘Best’ does not change? People do not get tired asking the best investment product. How do people define best, I seriously do not know?

Let me give you an example- You are not well. You go to a doctor and say I am not feeling well. Give me the best medicine in the world. Does it make any sense? No, Right! If you are having headache, doctor can simply give you a pain killer. A mild fever, the doctor can give you paracetamol. High fever- may be an antibiotic.

Do you ever ask a doctor, please give me the best medicine, without telling what your problem is?

Same happens with your investments.

Before moving forward, let me tell you the meaning of CRATON.

CRATON – Corpus Required at the time of Need

Asset Allocation – How it works?

I am 35 years old and have 50,000 per month to invest. Which are the best mutual funds to invest.

How would I tell you which mutual funds are the best? Yes, as a financial planner, I have researched on mutual funds and have a list of mutual funds which are performing well. It may be equity, debt or hybrid mutual funds. But how would I suggest you without knowing your goals?

You want to buy a car in next 12 month costing 6 Lakhs. I will simply suggest you to keep investing the amount in RD for a year assuming 7% returns. So, the mutual funds which are giving 12% returns are of no use to you.

Reason – Corpus is required after 1 year and you need to invest in safe instruments. Does the returns and your age matter here? You better know.

Now for the same situation, if you want to invest for your child education which is 10 years away. I will suggest you to invest in the amount in equity/debt mutual funds in the ratio of 50:50 or may be 60:40 after assessing if you have a debt heavy portfolio or equity heavy portfolio.

The situation would be different when goal of your child marriage is 18 years away. Here I can definitely suggest you the best equity mutual funds, which you are always searching for? But not in the other 2 scenarios.

Even in the last scenario, where CRATON is required after 18 years, I may start asking you to shift to debt mutual funds/FD after12-13 years. Your best mutual funds may be giving returns of 15% at that point of time but those returns may not be for you. You require corpus in another five years, Right!

So, what is important? Age, Returns or CRATON. It is always – Corpus Required at the time of need.

Also Read: Retirement Planning with Calculator- How to go about it?

CRATON my dear friend, CRATON

It will make no difference which equity mutual fund is performing best if your goal is just 2-3 years away.

Scenario 2

I want to invest 20,000 per month. Which is the best instrument to invest?

Take me as your financial doctor. My first question would be

1. Give me the list of your goals.
2. First, I will check which one is the nearest goal and have you planned for that, already?
3. If not, I will simply ask you to invest in Debt Fund or FD

Again, CRATON is very important in selecting the investment instrument. I need to check also, if any other goals are getting impacted?

I simply can not suggest you the instruments only on the basis of returns and your age.

I am 23 Years old. Can I invest my monthly surplus in equity mutual funds?

Again, I need to check your basics first (I am not considering any term insurance or health insurance etc). Let us talk about asset allocation only

1. Have you created emergency corpus for yourself?
2. If not, go and create one first?

What if you invested entire amount in equity mutual funds and there is some emergency after a year? The markets are down and you have lost 50% of your portfolio? There is no choice other than taking a loss of 50% because there is an emergency. You are young, you always heard about mutual fund returns but what is happening with you? Will you ever come back to invest in mutual funds again? I doubt.

Again, it’s a CRATON for emergency.

 Which is the best Retirement Plan? How much are the returns?

This one is tough. Do you really think, there is some best plan for retirement?

• You need to diversify for your retirement planning.
• There is no single solution for retirement- Neither at the time of accumulation, nor at the time of withdrawal.
• You have to diversify when you are investing, you have to diversify when you are withdrawing.

I will tell you how it works? You are aged 35 and want to retire at 60. I have calculated the future amount (which you will get at retirement) of your investments like PF, PPF, Bonds, FD, stocks, equity and debt mutual funds.

At the end, I came to know that you need to invest Rs. 50,000 per month (at a CAGR of 10%) for your retirement planning. I will check the equity and debt ratio in your portfolio and will suggest accordingly. If equity side is high, I may suggest equity/debt mutual funds in the ratio of 50:50. If debt side is high, I may suggest equity/debt mutual funds in the ratio of 70:30.

Since some mutual funds are giving returns of 15%, should I suggest you to invest entire amount in equity?

No, I will not suggest that. Here, I want to ensure that you are getting the returns and also you are safe.

I want to ensure that you reach at your retirement CRATON comfortably.

Keep This in Mind

The most important thing is CRATON and to achieve CRATON, you need to define you goals.

So, do not ask anyone these questions unless you have defined your goals. There is a chance that you may not feel the need of asking these questions to anyone once your goals are defined.

I am attaching the excel here, If you want to define your goals.

Financial Planning Goals

Happy Investing and Keep Investing.