One of the fundamental elements that go into Financial Planning is Asset Allocation. Asset Allocation means bifurcating your investment portfolio between different asset classes, like Equity, Debt, Gold and Real Estate. The idea is to arrive at an allocation which helps the investor achieve his/her life goals, and also is in line with his/her Risk Profile, this ratio is called ideal asset allocation.

To arrive at this asset allocation, your financial advisor will take your existing assets as the base. So, your existing stock investments will go into the Equity component, your real estate investments will go into the real estate component and so on. And then you develop a strategy to liquidate some assets and invest in some other assets to arrive at and maintain the Ideal Asset Allocation.

Here, one common error that most investors commit is they misjudge their existing asset base. We tend to skip a lot of our existing, often valuable assets. Even when an investor says he/she is 100% invested in Equity, it may not be the case. It means that 100% of his/her liquid assets are invested in Equity. The house you live in, if you own it, or your ancestral property these are are your assets. India is the largest consumer of gold, it's there in our houses or in our bank lockers, it's a part of our portfolio. The innumerable Fixed Deposits, RD's, PPF's, EPF's that you hold are your Investments. When you take investment decisions take into account all your assets. We don't even mention these assets to our financial advisor who is helping us in defining our ideal asset allocation. So, what happens is the advisor does not get a clear picture of our portfolio, and we are eventually tampering with our ideal asset allocation and overall financial planning.

If you skip one asset, let's say if you ignore your FD's, then your Portfolio's inclination towards debt will be more than required. And at times the asset that you are skipping may be of substantial value. Like you may have missed some kgs of silver and few gold coins which were left to you by your grandmother, and the value of this hidden treasure is Rs 20 Lacs. The Gold component in your ideal Portfolio is just 5%, and if you omit telling about these riches to your advisor, then your Portfolio is significantly bent towards Precious Metals, which should have been ideally invested in Equity.

Hence it is critical to to count all your assets when you begin with Portfolio Allocation and Financial Planning.

However, in most cases, investors miss to count an asset because they do not realize that it is an asset.

So, before moving further, let's understand what exactly is an Asset?

An asset is a product or property that you own, either tangible or intangible, which fulfills the following characteristics:

> Value

> Liquidity

Anything which has value, and can be liquidated to fulfill your goals or discharge an obligation, is an Asset. While determining your asset allocation, it is important that you take into account all that you have which fulfills the above criteria.

Now, it's relatively easy to calculate the value of financial assets, like FD's, stocks, EPF, etc. You can also get an approximate value of your gold. Real Estate is the tricky one here. One, the valuation of real estate is complicated, and secondly, your stance property on the property may be complicated. Say for instance, there is an inherited property which is jointly owned by 10 cousins of yours apart from you, and you know you cannot get an affirmation for sale at least in this life. Or a family farmhouse, which will never be sold, or the house which you plan to gift to your children, and have no intention to sell. Such properties, that is, which cannot be liquidated to fulfill a goal, cannot be construed as an asset.

Similar is the case with inherited jewelery, in fact, any piece of jewelery in most cases. Jewelery cannot be construed as an asset, if you are emotionally connected to it, and have no intention of selling it.

So, assets which are valuable, but cannot be liquidated, must not be counted on for your future goals.

The bottomline, Asset Allocation is one of the preliminary procedures in your overall financial planning, each of your investments is dependent upon your Asset Allocation. Your financial plan is flawed if you omit revealing a full account of the assets that you own, to your financial advisor. The advisor will be able to deliver quality advise, if only he has a holistic view of your existing asset base.

This is one of the most common questions that the investors in their late 50's, about to retire in the next few years, have. One of the fundamental concepts of investing is keeping the portfolio allocation bent towards equity when the investor is young and as he/she grows old, debt should occupy a major share of the Portfolio. However, it is seen that many investors take the concept to extreme levels by liquidating their entire equity portfolio and converting it to 100% debt, when their retirement approaches.

Is this the right thing to do?

Certainly Not.

This is not the right thing to be done, a balance needs to be maintained at all times, debt can control your risk, but it cannot grow your money. And you still have a third of your life, nearly 30 years lying ahead at the mercy of your retirement corpus. After all you have to plan for yours as well as your spouse's lifestyle maintenance for all those years.

So, what is the ideal Debt Equity allocation for retirees?

The answer to this is there is no specific allocation, it depends on the Retiree's financial position, Health and Risk tolerance levels. Say for instance, a retiree not having a source of regular monthly income, a traditional endowment policy in the name of insurance, only the Retirement corpus to bank upon for the rest of his life, it may not make sense for him to invest largely in equity or any other product which is risky in nature, because his principal need would be regular income and providing for emergencies. So, ideally this investor must be keeping a significant portion of the Portfolio in Debt so that the risk remains controlled, and he is able to meet his needs without the tension of losing the principal.

While bifurcating your portfolio between Debt and Equity, you must remember, that about the debt part along with Risk Control, Liquidity is also important. You'll be needing money for your regular income needs, plus there will be sudden expenses, like paying for AC repair, buying a new washing machine, buying an expensive wedding gift for your niece, helping an old friend in need, and the like. The remainder of your Portfolio can be directed towards wealth creation products like Equity mutual funds because there is a long period ahead and Equity's potential along with the power of compounding will work to push up the returns. Also, you must note that, when you use your debt investment, it's important to refill the safe investment bucket, from time to time, so that you have ample liquid and risk free money to last throughout your life.

The percentage allocation to Debt and Equity varies from person to person, it depends upon your financial position and various other factors, like if a retired person living in his own house, is getting a monthly pension, has a decent emergency fund, adequate medical and term insurance can consider investing a large part of his Portfolio in Equity since he has his expenses as well as risks covered.

You can sit with your advisor, and discuss with him your finances, your unique needs, your risk appetite and arrive at your ideal allocation between Equity and Debt. Further there are two approaches to maintaining your ideal asset allocation. You can have a fixed Debt Equity asset mix like 80:20 or 60:40 or 40:60, and keep rebalancing your Portfolio, to bring it back to the model Portfolio. Another approach is you can start with a portfolio with a higher allocation to Equity, since retirement may last for few decades, you can have a fair amount of Equity in the early stages and as you age, you can gradually bring down Equity and invest in debt, so may be when you reach your mid 70's, you can settle for a fixed portfolio.

Investing in balanced funds can also be considered, for maintaining the ideal asset allocation.

So the bottomline is, the general rule of increasing your asset allocation to debt when you are growing old, may or may not apply to you. It really depends upon a number of factors that is your unique circumstances. So, consult your financial advisor and devise your financial plan to ensure maximum peace in your second innings.

Like our marriage with our life partner, most of us develop a life long relationship with our investments, like our gold jewelery, the property we purchase, or even the PPF account we open for saving taxes. We seldom sell these assets.

One of the “first investments” of our lives is in a PPF account. The primary aim of investing in a PPF Account is tax saving and gradually the motive changes to providing a shell for our retirement years or meeting major life goals like daughter's wedding, children's higher education, etc. The gold jewelery that we purchased in the year 1990 is now worth ten times our purchase price, and it will be safe in our bank lockers for another 20 or 30 years or passed on to the next generation, at a worth much higher from now. The house that you are living in, or the flat which you bought 10 years ago, is now worth two to three times the value of your investment, and you might sell it only to purchase another bigger flat or to fulfill a life goal after may be 15-20 years.

Your PPF investment goes to the government and in return you get a fixed rate of interest plus you get tax benefit. Do you track your present value every now and then, did you panic when the government went to BJP from 10 years of Congress rule. No, you didn't bother, you kept depositing the PPF installment religiously. Did you sell your gold in the year 2013, when it reached 34,000 level? No you still hold it, prices fluctuate but you want to benefit from your investment in the very long run. Will you sell your house or the flat, when property price rise? No, it is your investment, you will hold on to it.

You are patient, because you are an Investor. You invest, you are patient, and your investments pay for your patience.

But when it comes to Mutual Funds, why do the rules change? Why don't we give time to our investment? Why do we keep tracking the latest value of the investment, Why our hearts sink when the markets fall, and so does our investment, Why do we sell our mutual funds when prices rise?

Mutual Funds have a track record of outperforming all other investment classes over a long period of time. Let's take an example of an equity mutual fund, HDFC Equity Fund, if you had invested Rs 10,000 in this fund on Jan 1, 1995 (inception date), it's value today would have been Rs 460,124 (Source: NJ Internal Research), which is higher than the average returns of gold, PPF and even real estate. This fund had yielded a return of 19.48% CAGR.

Mutual Funds have the potential, only if you give it time. Mutual Funds, apart from high returns, come with a blessing; Systematic Investment Plan (SIP) option. The SIP option enables you shape up your investment pattern. An SIP account is not an investment, rather it is a method of investing systematically.

An SIP account for a lifetime is investing small sums of money regularly throughout your life.

An SIP enables you to achieve all your life goals, without making a hole in your pocket in one go. Be it buying a house 15 years from now, or buying a car five years from now, your Mutual fund will be there for you. Even if your major life goals have been met by now, there are objectives which might erupt in due course. You might want to pass on something as a legacy to your grandchildren, or you might want to donate an ambulance to a hospital, or you would want to fund the education of your maid's children. Your SIP will be there to satiate your Philanthropic aspirations as well.

Let's say you start an SIP for an amount as small as Rs 500 a month for a period of 30 years, yielding an average return of 15% pa. Today Rs 500 a month is equivalent to the price of a Cheese burst pizza, tomorrow it might be able to buy only a Chocolate. But do you know what would be its worth 30 years later?

Rs 28.16 lacs

Yes, the money you spend on a pizza today or a chocolate tomorrow can give you Rs 28.16 lacs.

What if you commit Rs 500 for the next 50 years, which might be given to your granddaughter on her 16^th birthday?

Rs 4.67 crores

The pizza or the chocolate or may be a candy can build Rs 4.67 crores of wealth for your granddaughter.

An SIP account is a step by step process of investing, and like they say The Cup of knowledge is filled one at a time, SIP fills your cup of wealth one at a time.

Reach your advisor, and ask him to find a suitable mutual fund scheme for you, for meeting your goals in the very long run. Start an SIP option in the fund of your choice from the very beginning.

Like your PPF, or your RD, keep depositing your SIP installments. There will be times when your investment will fall or rise, don't get excited, relax. Keep investing. 20 years hence, when you will check your account, you'll be elated to see your money's worth. During this tenure, you might be tempted to buy a car or a phone, do not break your SIP for leisure. You SIP is your lender of last resort, redeem it only when all other doors are shut, only when you are in dire need of money. Yet if you withdraw in an extreme case, do not stop paying your next installment. Remember, this will help you the next time when you are in need.

When you approach the age of retreat, you will realize that your goals are met, emergencies are taken care of easily, yet you have significant wealth created to support yourself in the end.

A mutual fund investment is your friend for life, and your SIP account is the string which connects you with your virtual friend.

We have our viewpoints about people, places, things and a variety of other stuff in life. Men look feminine in Pink, Chinese is better than Italian, or the other way round, hills are more serene than beaches, and vice versa, and likewise. We cling on to our ideas and perceptions, and over time they become fundamental to our existence. Our perceptions are influential in character and control our decision making ability. They become so inherent to our nature that it is difficult to think and take decisions from a neutral mindset. Likewise, many of us have also developed some perceptions about investing, which are mostly misconceptions, they have hampered our decisions and have undermined the growth numbers of our investments. In this article, we have listed and have tried to debunk three most common myths associated with investing:

1. My traditional life insurance policy not just saves tax, but also provides Life Cover as well as Creates Wealth: The primary reasons behind investors buying traditional life insurance policies is they fall under Section 80C of the Income tax Act, along with PPF, NSC, FD, etc. And secondly they serve the dual purpose of investment as well as insurance. But the irony is a traditional endowment policy practically doesn't serve the purpose, it isn't good at any of the above.

Facts:

1. Yes, the traditional endowment policy does save tax, but that's the only real return you get out of it. The return numbers are so petty that they may barely cover inflation.

2. The cover that these policies provide is again highly inadequate to take care of your dependents' needs for a long period of time, vis a vis the high premiums you pay. The modern term covers are much more affordable in terms of premiums and the cover provided also justifies the term 'life cover'.

3. And Yes, you will get your investment back if you don't die after a certain period of time, but as indicated above the returns are slim, so the corpus you will get will also be modest. The modern ones won't give you your money back if you don't die, but they will serve their purpose, provide Adequate Insurance.

The best way to Invest in Equity is through IPOs: Many investors believe that investing in IPOs is the sure shot formula of making big bucks quickly. And this is the reason why the markets are flooded with IPOs in bull market conditions, companies want to capitalize on the positive market sentiment. People have made tremendous money in IPO's, but we must remember that not every IPO is D-Mart. If some investors have made money, many others have also lost money in IPOs. Investors aim to enter at low prices, but the reality is the IPO stocks are already overvalued when they enter and they lose money when they list and the prices correct to reflect the true value of the stock. Investing in Equity is not based on profiting from a day's volatility, the right way of investing in Equity is by focusing on the fundamentals and profiting from the long term growth of the company.

Lower the Price, Higher the Returns: Investors want to Buy Low and Sell High. On this basis many investors believe that a cheaper stock is a better deal than an expensive stock. But the reality is a Rs. 10 rupee stock could be expensive and a Rs 1,000 stock could be cheap. The price of the stock is based upon it's fundamentals, it's management structure, it's past earnings and future earnings potential, the debt equity ratio, etc. If the fundamentals are strong, the Rs 100 stock is capable of growing spectacularly and vice versa. The same applies to Mutual Funds also, lower NAV's don't mean that the fund is cheap or expensive, it reflects the fundamentals of the underlying stocks and other securities. Do not base your decision of investing in a Mutual Fund Scheme on it's NAV, NAV is just the price of a unit of the scheme, concentrate on your needs and try to match them with the fund's characteristics and investment objective. Your financial advisor will help you selecting the perfect fit for you.