Featured in Economic Times on 03/06/2020
We were conducting an online interactive session on investing for a corporate client recently. Sanjay, one of the participants, asked me whether he could create an Atmanirbhar portfolio, which works under all market conditions. He was referring to the self-reliant pitch used by the prime minister in one of his addresses to the nation. I have been talking about the idea of creating a portfolio for a lifetime that is immune to all market conditions for several years.
What is an Atmanirbhar portfolio?
An Atmanirbhar portfolio is an all-weather portfolio designed to work on its own. It is a proven fact that there is no single asset class, which can consistently outperform other asset classes year after year. What looks like the best asset class today could prove to be laggard in future, which makes timing the market a futile exercise.
It is practically impossible to plan to buy an asset class at its low and sell at high, and you may not have time to manage that. Therefore, what you need is an Atmanirbhar portfolio, which takes care of this problem for you. The key point that comes into picture here is diversification. A diversified portfolio helps to manage and absorb shocks of the market to make sure your investments are protected.
Sanjay wasn’t convinced. “This is contrary to what Warren Buffett and many investment gurus have advised,” he said.
He went on to quote the great investment guru Warren Buffett’s thoughts on diversification: “Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
Sanjay wanted to know how he is going to create great wealth if he is investing in different asset classes to mitigate risk.
You need to diversify, not Buffett
I am not questioning the wisdom of the legendary Warren Buffett, I explained to Sanjay. Warren Buffett was talking about stock market investment. Also, he was talking from the perspective of a stock market investor who has an army of specialists watching over his investments to decide what to pick and what/when to sell! In fact, Warren Buffett doesn’t just buy stocks, he can actually buy companies.
I told Sanjay that investing is very different for people like us. If you are in the same business that Warren Buffett is in, then it makes sense to follow him blindly, but not otherwise.
As a retail investor, you would not have the time to manage your investments daily and spend hours tracking market movements to make decisions rapidly. You need to focus on your primary job or business and let your money work for you. The money you earn there goes into different asset classes.
What Warren Buffett said about investing can certainly be applied to your job or business. There is something that I always tell my clients and have talked about in detail in my book Financial Spirituality as well. As a retail investor, you are your own stock. The best return on investment that you would get would be from your job or your business.
How to create an Atmanirbhar portfolio?
You need to go to the drawing board and create a blueprint based on your income, expenses, financial goals, liabilities, timelines, and overall risk profile. Once that exercise is done, you need to decide which investment products are best suited to meet your financial goals.
For example, you need a sizable corpus to take care of your golden years, as your retirement phase cannot jump beyond a particular age. If you plan to retire early, then it becomes even more important to plan, because you would have many more years to manage without any active income source. Similarly, you cannot postpone your children’s education or marriage plans because of any negative economic conditions like the ones we are witnessing right now. This is precisely the reason you need to create your asset allocation in such a way that it protects any market conditions.
Similarly, protection is also an extremely important part of such a portfolio. Health insurance and life insurance are vital components of your portfolio to make it truly atmanirbhar.
What is the ideal asset allocation?
The question inevitably comes up in most sessions. I told Sanjay that a one-size-fits-all rule does not apply to asset allocation because each person has different goals, responsibilities, and a unique risk profile. Every asset class has a potential risk and there will always be a market risk involved with any of your investments.
Equity offers the best long-term growth prospects to investors. Cash has a role to play especially in current conditions. You should aim to have a good mix of cash, equity mutual funds, PF, PPF, real estate, gold, NPS, FD, and direct stocks if you can manage that. Depending on your financial goals and risk profile, the percentage of allocation in each of these will differ.
If you are young and have time, then go for equity mutual funds. If you have bought a house, then you would spend more on EMIs. Go back to your personal financial plan, and see what fits in that. That is why I do not give specific percentages, because one plan cannot work for everyone.
Sanjay then asked the two questions that are coming up most often in the time of this crisis, that is whether to invest in gold, and whether to invest in pharma funds.
Gold is doing well right now because it is always seen as a safe haven, something that works when nothing else does. If you want to buy gold right now, go back to your asset allocation and see if it allows that and ideally it should not be more than 10% of your overall portfolio. Do not buy it just because everyone else is buying it.
Similarly, for pharma funds, understand that it is a sectoral fund and have not given any returns in the last five years and so. While it is true that this sector is giving good returns right now and may go into a bull run but you do not know how long it will continue to do so, my advice is to avoid any sectoral fund.
How to decide equity mutual funds allocation?
We have seen over the years that many investors do not invest with the right financial planning and asset allocation. More than 70% of investors have less than 20% asset allocation in equity, and have a far higher allocation in real estate, gold, PF, and PPF. For all investors, I would recommend relooking at their asset allocation and using cash to capitalise on the current market opportunity.
This is an opportune time for everyone to invest in equity for long term gains. Mutual Funds Sahi Hai! There is no better time than right now for this tagline. Mutual funds through SIP is the best way to get into equity investments right now. But do this basis as per your asset allocation and take an informed decision.