Recently, market regulator SEBI changed the rules for multi-cap mutual fund schemes. You can apply this rule to financial planning too. SEBI has mandated that multi-cap schemes have at least 25 per cent of their portfolio each in large, mid and small-cap stocks.
As per your financial goals and risk appetite, you have the choice of investing in different kinds of mutual fund schemes. You may have a mix of large, mid and small-cap schemes or you may choose to invest in one multi-cap fund which will have exposure to all the three segments.
Most of the multi-cap schemes in India have significant exposure to large-cap stocks (50 per cent-85 per cent).
Generally, investors do not check the allocation of these schemes as this is the fund manager’s job.
SEBI took a note of this and introduced the 25:25:25 rule for multicap schemes. Only the remaining 25 per cent of the portfolio could be invested as per the fund manager's discretion.
But how is all of this related to your financial planning process?
Preference of FDs and properties
In India, individuals and families end up investing most of their assets in only one or two asset classes. Most likely, the majority of their investments are in property and fixed deposits (FDs). Let's address what the issues are with this kind of a portfolio:
Real Estate investment is illiquid:
-You may not be able to sell your property in case of a need.
-You cannot sell in parts – so, if your property's value is Rs 50 lakh and you need only Rs 10 lakh, you will still have to sell the entire asset to get that sum
- Properties are prone to disputes – encroachment, title issues, delay in possession given by the developer, or family matters.
- Blocks a huge percentage of your portfolio given the ticket size of the investment.
Fixed deposits do not beat inflation:
-Have you heard or seen anyone getting rich by investing in FDs?
-Inflation explains it all. The rate of interest that you receive on FDs is lower than the inflation level. So, instead of growing, your money diminishes in value.
I am not saying that you should not invest in real estate and fixed deposits. But you have to be cautious with the allocation of your investments. They need to be balanced.
The 25:25:25 rule
Can you guess which of the below-mentioned asset categories have been successful in beating the inflation, in the last 40 years (on average)?
-Real Estate (plots, flats, agriculture land, commercial, industrial)
-Fixed Deposits (Recurring deposits, Bonds, Debt MFs, PPF, EPF, et al)
-Equity (Stocks, Mutual Funds)
-Insurance (ULIPs, Pension Plans, Child Care & Money Back plans)
The answer is: real estate and equity
Others have only depreciated the value of investors' money. And this is the case with any growing economy.
Choose any three assets out of the above-mentioned five options and divide your portfolio and invest 25 per cent of your corpus in each of them. Keep in mind that not all investments are great at beating inflation. So choose wisely.
After diversifying your investments in the three assets equally (i.e. 25 per cent each), the remaining 25 per cent can be invested in a fourth asset class or redistributed among the existing three assets. This will diversify your portfolio and you can reap the benefits of these assets at different points in time. If you have any doubts, take advice from your financial advisor.(The writer is a SEBI-registered research analyst at www.anupamroongta.com)