Check out: Common age-related asset allocation myths

Gaurav Mashruwala, Certified Financial Planner believes in theory it is easy to have age-related asset allocation but not in real life situation. Basically, asset allocation has to be predominantly decided on investors’ financial requirement and not based purely on your age, he adds.

Guarantor to loans: How cautious should you be? He further explains, each individual’s financial responsibilities, goals, income levels vary, so only depending on these and other factors asset allocation can be done. Below is the edited transcript of his interview on CNBC-TV18 Q: The traditional rule we learn when we get into asset allocation is that your equity investment should be 100 minus your age, how important is age as a factor when you do asset allocation? A: In theory it is easier to have age-related asset allocation as you mentioned but when we face real life situation it is not as simple. Assume, there are two 31-years-old Indians; one of them is single from IIT or IIM, working in a foreign bank, no dependence, parents are well settled, his asset allocation vis-à-vis the other 31-year-old who is living in a tier II, tier III city and is married with a child and also has responsibility of his sister marriage etc then his asset allocation will be drastically different. So while it is easier in theory to talk about age related asset allocation, in reality it all comes down to what your financial responsibilities are, what your goals are and by when they are likely to occur. Also what your income levels are, do you have loans etc. Other factors should be considered before deciding how much money from my income or from my existing wealth should I allocate towards equity, gold, debt etc. Q: Is there any new formula that you have achieved after putting to rest the myth that is the old formula? A: There is no standard formula; we will have to look at case-to-case basis. So, when we face a real life situation or a client or a viewer or a reader writes or call us, we ask him few questions. Questions as to when he is likely to require this money and is he expecting any kind of financial responsibility or goal or dream or aspiration that he wants to chase in next two-three years and hence choose debt as an instrument then he may choose whatever vehicle. He may choose an fixed deposit (FD) or a debt based mutual fund or bond or something. If the goal is likely to occur after 7-9 years then choose equity as an asset class; one can go directly or take a mutual fund. For an interim period, you can make a combination. Gold always has some role to play in terms of balancing factor. So, it is predominantly decided based on your financial requirement of that funds and not based purely on your age. SMS Q: Rakesh Singh Ahluwalia is 35-years of age, married and has no dependents. He has extensive investments in the equity markets though with some stocks being in his portfolio for over 10 years. His equity portfolio is also his retirement corpus and has very few debt instruments as his job gives him the luxury of investing in relatively risky instruments. He now wants to start a business, so his main question is should he opt to take a loan that covers most of the expenses for funding the business venture or should he sell some of his equity holdings, what would you advise him to do? A: It is more business kind of question because he has not clarified how much equity portfolio he has, what are the expenses and what kind of revenue stream would come in. So it becomes little difficult but as a rule of thumb from personal finance angle what he should be looking at is ensure that he has assets which can generate regular income for his personal expense. I am looking at family expenses for next one to one and a half years. Once you have enough provision to look after your family expenses for one to one and a half years, rest of the money could be deployed in business. Now, whether he liquidates his existing assets or borrows, would depend on what are the cash flows, what are the profits that he is likely to make, so those are business related questions. However, he should ensure couple of things; ensure enough regular expenses, ensure there is enough health cover because once he quit the job; he may not have enough health cover. Also if there are any other financial goals which are likely to occur, then he should make provisions for those. Once that is taken care of, it is more of a business decision that he will have to take.