Any ownership that creates positive economic value and can be converted into money is called an asset. Any commodity that grows in value has generally termed an asset (the only exception being a personal transport vehicle that is considered a depreciating asset).
You invest some money in gold today at Rs. 5000 per gram and sell it off after 3 years for Rs. 7000 per gram. You make a net profit of Rs. 2000 per gram. Gold can be classified as an asset because you derive positive (profit of Rs. 2000) economic value and can convert this (by selling) value into money.
Similarly, a property such as a flat can give a dual returns-one in the form of rent and another in the form of surplus at the time of sale. If you purchase a flat for Rs. 30 lakhs and sell it for Rs. 55 lakhs, you clearly stand to gain Rs. 25 lakhs.
Amongst financial assets, you may choose to invest in Public Provident Funds (PPFs), Bank Term Deposits, or Life Insurance Policies, depending on your risk appetite.
Why should you Weigh One Asset Higher?
Asset allocation is the dominant factor driving return on investment and any investment made should clearly align with your short and long-term financial goals. Some assets such as equities give superior returns over the long term but carry significant risk because the returns are subject to volatility in the market.
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Assets that give lower but reasonably guaranteed returns are low in risk. Asset selection or allocation is a highly personalized decision and depends on your personal circumstances, aspirations and risk appetite. One size fits all approach does not work here. You must maximize future value depending on your individual tolerance level. Here are a couple of scenarios:
1. Risk-Averse/Conservative:You may not like to take aggressive risks because you do not have the safety net to fall back on. If you think you have way too many commitments planned for the future, you may like to invest in safer instruments that do not involve too much exposure to equity markets. Guaranteed Savings Plans offered by Canara HSBC Life Insurance could be a good option to look at. These plans are good for guaranteed pay-outs at defined milestones besides giving better returns than standard bank deposits.
2. Very Aggressive/Wealth Creation Mode:You are young and have minimal financial commitments at the moment. You want to focus on wealth creation that can help you build a large corpus for your future. You are also aggressively saving for retirement. Wealth creation requires adequate exposure to equities early on in your career. As you approach mid 50’s you can move into wealth preservation mode by putting your wealth in safer instruments.
The above two are the extreme scenarios of risk appetite. There are a couple of other possible scenarios that lie between these two ends of the spectrum. Moderately conservative/moderate/aggressive are variants with different degrees of exposure to equity and debt. Try to assess what kind of risk appetite do you have. Basis your risk appetite, refer to the table below to allocate your funds between equity and debt.
Investments with Flexible Asset Allocation
While it makes sense to maintain an asset allocation you feel comfortable sticking to over a long period. However, you may question if you have enough time or expertise to manage such a portfolio. Here are a few savings and investment options that will do it all for you:
1. New/National Pension Scheme (NPS)
NPS is a popular retirement savings scheme for Indian citizens. Although NPS is famous for retirement savings, it also allows non-retirement investments which are more open-ended.
A) NPS Tier-1 Account:Meant for retirement savings, normal withdrawals are allowed only after retirement or the age of 55. Offers tax benefits of up to Rs 2 lakhs on investments.
B) NPS Tier-2 Account:Normal savings and investment account. Does not have a lock-in period or tax benefits.
Both these accounts offer a custom portfolio investment under Active Choice and Auto Choice options. Active Choice lets you decide the asset allocation between equity, corporate debt, government bonds and alternative assets. The auto choice option will manage your portfolio under set allocations automatically as per your age.
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2. Unit Linked Insurance Plans (ULIPs)
ULIP plans also offer a mix of assets with different risk profiles for you to invest in. You can choose to manage your portfolio manually in ULIPs or choose one of the automatic strategies. The automated strategies can help you manage the risk in your portfolio for the long term.
Also, you have three unique advantages of investing in ULIPs:
i. ULIP plan like Invest 4G from Canara HSBC Life Insurance will automatically transfer your equity fund allocation to debt in the last four policy years. This is done systematically to reduce the risk of the equity market on your portfolio in the final years of the investment.
ii. ULIPs offer bonus additions to your portfolio. Invest 4G offers two bonuses for long-term investors. Bonuses are free units added to your ULIP to help portfolio growth.
iii. You can use the life insurance cover in ULIPs to protect the final value of the ULIP investment. This makes ULIPs the best investment option for meeting your child’s higher education and marriage goals.
Investments have to be done basis individual risk appetite and goals. Always keep in mind the extent to which you can take risks and allocate funds to appropriate financial instruments. If you want to maximise your returns from an investment you need to give it sufficient time.
This is only possible if, first, you can, and second, you feel confident in your choice. Both possibilities arise only if your overall portfolio is well within your risk appetite.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.