Stress test for your portfolio

Asset classes have been reacting to bad news, both global and domestic. Stocks and bonds have tipped over in the ensuing sell-off by foreign investors. And, there seems to be no respite from the woes.

Amid all this, one way to protect yourself from financial uncertainty, stock market volatility, the economic slowdown and even your own mistakes and excesses is to prepare a financial plan and stick to it. A well-grounded financial plan that encompasses your current financial situation, your goals and income needs not only shields you against volatility and diversification but also ensures the portfolio gives you steady returns over the long run. We ask three financial experts and wealth managers to prepare a financial game plan for you:

Review your progress every quarter: Gaurav Mashruwala

Use a three-pronged strategy for financial planning that encompasses wealth protection, accumulation and distribution.

Financial protection is the first step. Maintain funds equal to about three months of expenses, so that it helps you through a loss of income. Have sufficient health insurance for all members of your family. This would cover health-related eventualities. Breadwinners should have sufficient life insurance to take care of a family's needs in case of any eventuality.

Next, focus on wealth accumulation. Repay all loans at the earliest. Loans should be backed by assets. As always, your emergency reserves should be factored into your equated monthly instalments (EMIs), to ensure you have funds to pay your EMIs if there's a loss of income. For investments, focus on your financial goals, without exception. All your funds needed to meet short-term financial goals in the next one year should be kept in liquid, cash and short-term bond mutual funds. These mutual funds are not adversely impacted when interest rates rise.

For all your financial goals for the next two-four years, investments should be in bond mutual funds. While these funds have witnessed negative returns, most of these would regain soon, as the bonds in which investments have been made would accrue interest and add to your returns. For those with financial goals more than seven years away, invest in equity and equity-based mutual funds in a systematic manner. Past performances of most equity markets show there aren't many instances in which investors have lost money if she/he has invested in equity either directly or through a mutual fund in a systematic manner for more than seven years. Therefore, focus on your financial goals and review your progress every quarter.

Gaurav Mashruwala
Certified financial planner

Don't try to time the market: Ajay Bagga

In 1975, Charles Ellis wrote, "The average long-term experience in investing is never surprising but the short-term experience always is."

In today's extremely volatile times, investors need to remind themselves of this. Unfortunately, investors are driven by greed and fear, rather than a disciplined approach, based on a well thought-out financial plan. So, what advice do we have for investors today? Think long-term, have a financial plan and a strategy to execute it, diversify and don't try to time the market. Rather, keep saving and investing regularly in a disciplined manner, according to your plan. It is important to remember what Sir John Templeton had said: "The four most dangerous words in investing are, 'This time it's different'."

Investors need to understand themselves, understand what they are investing in and remind themselves the broad rules of asset allocation always work in the long term. Actual financial plans would vary according to investors' key financial goals (education, buying a house, marriage expenses, children's education, retirement, taking care of parents, etc), tolerance to risk and time horizons and the broad situations of income, expenses, savings, debt and, consequently, investments.

While aged 25-40, accumulate wealth. The focus should be on creating income, enhancing savings and investing for the long term. It's critical to have a term insurance policy that provides an income stream for dependents. We would recommend a large allocation (50-70 per cent) to equity assets through a mix of large-cap diversified mutual funds with vintage track records. This segment should buy a house as early as possible, even if one is staying with parents. This will give them inflation-protected, tax-efficient growth and forced savings. The rest of the funds could be in a portfolio of income funds and fixed deposits.

While one is 40-50-years old, his/her income generation levels usually peak. This segment needs to optimise savings and ensure returns on accumulated and incremental portfolios are enhanced to build the targeted retirement corpus. Allocate 50-60 per cent in large-cap equity mutual funds or index funds, 20-30 per cent in long-term income funds and 10 per cent in tax-free bonds, given the high yields available for long terms.

When one approaches retirement (50-60 years), mortgages should be largely paid off and children settled. Investors should estimate what they would get in terms of pensions and the targeted corpus they need to maintain their lifestyles. To reduce portfolio volatility, equity allocations could be gradually reduced to 15-25 per cent. Immediate or deferred annuities with lifelong assured payouts, though taxable and giving low returns, should be bought to assure a steady income stream. Tax-free bonds from public sector companies offer good returns for long periods. The majority of the allocation should be towards income funds; currently, fixed maturity plans of tenures up to three years are available and the high yields on offer can be locked in through these.

BAGGA'S PLAN

AGE GROUP 25-40

• 50-70% in large-cap equity mutual funds
• The balance in income funds and FDs

AGE GROUP 40-50

• 50-70% in large-cap equity mutual funds
• 20-30% in long-term income funds
• 10% in tax-free bonds

AGE GROUP 50-60

• 15-25% in equity large-cap MFs
• The balance in income, FMPs and tax-free bonds

Ajay Bagga
Head of private wealth management, India Deutsche Bank

Opportunity in negativity: Sundeep Sikka

Since 2008, the macroeconomic environment has been quite challenging due to the global financial crisis and the ensuing impact on developing economies like ours. As a result, returns from investments in capital markets, particularly equity markets, have been quite flat, muted and even negative. Fixed-income returns, though better than returns from equities, have been volatile, especially in the near term, owing to the challenges thrown by a depreciating rupee and consequent action by the Reserve Bank of India.

However, this negativity offers an opportunity-a cheap entry point into the market. With the rise in the Sensex, domestic investors should buy into the index at current levels. It is important for investors not to be completely swayed by the recent past and have faith in the well-established tenets of financial planning, which, among other things, advocates healthy allocation to growth assets such as equities, depending on an investor's risk profile and the benefits of investing in such asset classes over a long period. This would help them beat inflation, generate real returns, create wealth and be better placed to meet many of their critical financial objectives.

Investors are cautious of the market, as they fear it would crash. That's what history has demonstrated -every big rally is followed by a crash. If you analyse carefully, despite the lacklustre returns in the recent past, long-term returns from asset class, such as equities, for instance, are quite robust. The average 10-year rolling returns from equity markets (considering the BSE Sensex as the index to broadly represent equity markets) since 1995 have been a little more than 14.5 per cent compounded. At this rate, the investment would have typically increased four-fold through 10 years. Similarly, returns from fixed-income investments have also been fairly strong, helping investors beat inflation. Investments in the capital market should be looked at from a long-term perspective. As rightly said, stone after stone in the pitcher raises the water level; similarly, patience is the right virtue for long-term wealth creation.

Sundeep Sikka
Chief executive officer, Reliance Capital Asset Management