March 27

Plan Your Investments to Achieve Financial Goals


Assess the Risk Appetite

Anil and Sunil are working in TCS as software engineers. Anil is 36 years old. Sunil is 52 years old and wants to take early retirement at 55 years. Their take home monthly salary is Rs.1.25 lakhs and Rs.2.00 lakhs, respectively. In order to assess their risk appetite, we need to assess their willingness to take risk, capacity to take risk and need to take risk. Anil is willing to take high risk because he is young where as Sunil wants to play safe since his retirement is approaching. Sunil has already built up a good portfolio out of his savings and hence he has more capacity to take risk. But there is no need for him to take risk since he wants to retire shortly whereas Anil needs to take risk to build a good portfolio. So risk appetite is the level of risk that one is willing to take on the investment which depends on the age, individual sentiment, time horizon, financial goals and liabilities. The risk appetite may be conservative, moderate or aggressive.

Stick to the Asset Allocation

It is advisable to diversify into various asset classes .One should not invest his/her entire amount in a particular investment vehicle because in case the downside risk materialises, the entire portfolio will decline in value. A general thumb rule on equity exposure is hundred minus the age of the investor. Suppose your age is 35, you can put 65% (100-35) of your portfolio in equity. The balance amount can be put in debt, gold and liquid instruments. The asset classes should preferably be negatively correlated or less positively correlated. A diversified portfolio should have exposures in equity, debt, gold and other money market securities. If one does not have the knowledge or expertise for stock selection for active portfolio management then passive portfolio management through investing in mutual funds are preferable. Further small and mid cap stocks have higher volatility although they may generate higher return. So equity portfolio must have a combination of large cap fund, mid cap, and small cap stocks. Gold is a hedging product against inflation. One should have 10-15% of the portfolio in commodities like gold. The balance amount can be invested in debt and liquid instruments which can be taken through Mutual fund MIP, balanced and liquid schemes .One can also invest in fixed income instruments like PPF, FMPs, Bonds and Bank FDs etc.

SIPs (Systematic Investment Plan)

Equity market is always volatile. To minimise this volatility, one needs to invest in SIP mode. In SIP mode, one will get more units when market is lower and fewer units when the market is higher. When the market rises, the portfolio will appreciate. By buying when market corrects, the average cost comes down. This is called rupee cost averaging. So the regularity of fixed periodic payments should be maintained to manage the volatility. One has to pay a fixed equal amount every month. If one has been investing in a SIP mode and market has corrected, one should not stop SIP as when market will go up, the value of portfolio will appreciate.


Rebalancing is the most important part of investment planning. When the equity/debt portion of the portfolio appreciates above a predetermined level, one should book profits and use the proceeds to enter into the other segment which are attractively valued. So when equity market is at lower levels, one should increase equity exposure and reduce debt exposures and vice versa. So rebalancing is a technique to generate optimum return. One should rebalance his/her portfolio periodically. Rebalancing should be undertaken under the following situations.

a. When significant gains (such as those from the bull market) or major losses have skewed intended allocations.

b. When investment objectives change. The changes could be effected by financial circumstances like a hike in pay or due to reassessment of corpus requirement amongst other factors.

c. When one needs to shift portfolio in to less risky assets as goal year approaches.

d. When a stock or a fund seems to be consistently underperforming the benchmarks.

e. In case of a mutual fund, when a proven manager leaves a fund and one is unsure about the substitute.

Tax Treatment

Before going for any investment, one should know about the tax treatment because tax eats major portion of income. If an asset (equity or debt fund) is sold after one year, it will be considered as long term capital gain else short term capital gain. There is no tax implication for the long term capital gain but for short term capital gain, one has to pay 15% tax. In case of debt scheme, for long term capital gain, the rate is either 10% without indexation or 20% with indexation. For short term capital gain, tax is calculated as per individual slab rate. There are different tax implications for dividend distribution. If a mutual fund declares dividend in an equity oriented fund (more than 65% equity), there is no dividend distribution tax but in case of debt scheme, it is 14.162% and in liquid mutual fund, dividend distribution tax is 28.325%.


Financial Goals, Investment Planning

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  1. I am investing in equity and debt funds for my son’s education after 14 years. Could you explain with an example how to track the performance of the fund and the approach the ‘Rebalancing’ part to achieve optimum returns

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