Not everyone is comfortable with equity. This wild asset class does deliver inflation-beating returns in the long term, but the volatility it brings on to the table is what makes many avoid it.
In an ideal world, this would have been fine. But in the real world, where inflation is a reality, the zero-equity approach of conservative savers doesn’t work. The problem with keeping all your money in debt or fixed-income instruments is that the post-tax returns from them will not beat inflation.
So your money will lose value, and your purchasing power, in general, will not grow with time. As a result, you will find it difficult to meet all your long-term goals. Equity, as an asset class, is volatile but it does beat inflation over a long period of time.
For short-term goals, equity isn’t required much. And different goals need different asset allocation. Let’s focus on long-term goals, which demand investors to be serious about picking inflation-beating returns.
Is nil equity allocation really that bad?
If you don’t want to invest in equities, it’s fine. But just remember that if you have to achieve your goals in the long term, you will have to invest a lot more.
Let’s take an example. Suppose your goal costs Rs 20 lakh today. You want to achieve this goal after 15 years. Inflation is a reality. Let’s assume it’s 8 percent. The same goal will, therefore, cost about Rs 79 lakh after 15 years. How much do you need to save or invest if you go for equity? If you want to avoid equities, how much should you save?
• Without equity: You need to invest Rs 24,000-25,000 every month for the next 15 years. This is assuming that your debt investments give
7 percent average returns.
• With equity: You need to invest Rs 17,000-18,000 every month for the next 15 years. This is assuming you invest your entire corpus in equities, assuming it grows at 11 percent on a compounded basis.
It doesn’t come as a surprise that you got to invest more if you don’t have equity for long-term goals.
Related Reading – Invest More Or aim for Higher Returns?
What if I don’t like risks?
If you have been a conservative saver till now (with 95-100 percent in debt, real estate, etc.), accept that this is who you are. Don’t try to force yourself to become aggressive overnight. It won’t work.
Given your finances, your risk capacity may still allow for it, but your risk appetite will eventually decide how much equity you should begin with.
Now, here are a few possible strategies for conservative investors to scale up their equity allocation for long-term goals:
• If you have a very long-term goal (15+ years), start the first year with 10 percent equity.
• Next year, increase it to 20 percent, then 30 percent, and eventually up to 50-60 percent over the next few years.
The idea is to ease into a rising equity glide path and get comfortable first. Over the initial few years, you will understand how equity returns fluctuate and what can happen in good years as well as in bad years.
So your increasing experience will pave the way for you to have more equity for long-term goals, eventually. Let’s say, you need to invest Rs 25,000 monthly for a goal. Start with at least Rs 2,500 in equity funds in the first year. Next year, make it Rs 5,000. That is how you can do it for recurring investments.
This one is a pretty crude approach but may work well if someone is ultra-conservative.
Assume a person with Rs 50 lakh in bank FD. He now wants to ‘try out’ equity but doesn’t want to lose any capital.
• Use the monthly interest from Rs 50 lakh FD as monthly SIP into equity funds. So, we constantly use the monthly interest payout without dipping into the FD principal.
And since the FD corpus remains as it is (for years), the equity corpus starts small but increases with each passing month. To see how equity allocation would have increased over a long period, I simulated 6 percent FD (assumed to be fixed), paying monthly interest for a 10-year period (2012-2022), which was invested as monthly SIP in Nifty50.
The result is that Rs 50 lakh would have stayed in FD as it is. But over a period of 10+ years, the equity corpus would have grown to Rs 55-60 lakh, just by having your monthly FD interest invested in SIP.
Which equity funds are suitable for conservative investors?
For conservative investors who want to invest up to 35 percent in equities, the choice of fund category will depend on the chosen equity allocation being targeted.
Here are a few options:
• For 1-15 percent equity – Index funds based on Nifty50 or Sensex
• For 15-35 percent equity – Index funds, Balanced Advantage Funds, Aggressive Hybrid Funds, Flexicap Funds
Being a conservative investor is fine, but only if you have sufficiently large savings capability. Else, you should consider gradually introducing some equity into your portfolio, or else, you will guarantee yourself a low return, which is unable to beat inflation.
Disclaimer: Do not consider the above as investment advice. If you are a DIY investor, please figure out what is the best equity allocation for you. If you have doubts, talk to an investment advisor.