Category: Asset Allocation

Asset Allocation Holds the Key to Returns

‘My grandparents always believed property and gold were the two best and only investments one needs to possess.” Haven’t we heard this many a time, especially from senior people who have disposable income, but keep buying more properties?

Sometimes, these people even consider taking loans at 60 years of age to acquire a property for their golden years. Why? To earn a rental income as a source of retirement inflow?

Nothing can be further from the truth on the myth about real estate and gold being the best investment avenues.

In fact, there is NO best investment avenue today, since all asset classes perform differently at different market cycles and have all experienced being at the boom and trough of a market cycle. Yes, including gold and property!

Therefore, what is most important is asset allocation in a portfolio to ensure that an average return on the basket of assets has been achieved which is above inflation!

With only 3-5% savings being channeled into equity asset classes and mutual funds in India, compared to 77% in US, 41% in Europe 33% in UK, our equity market is highly undervalued. If this figure even moves up to 15% in India, negating FII inflow, our equity markets will get a ‘push’ on performance with domestic allocation to equities.

India would then be less dependent on FII monies, which are erratic and short term in nature.

Low customer awareness and lack of financial literacy is one of the biggest roadblocks of channelizing savings in mutual funds and equities.

Although, SEBI has tried to penetrate small towns and increase geographical reach, by introduction of Total Expense Ratio (TER) in funds by encouraging savings from smaller towns; introduction of Rajiv Gandhi Equity Scheme (RGES); done away with PAN for small investors, there still needs to be much more awareness created of the categories and types of saving avenues available for investment. Coupled with this of course is the urgent need for unbiased and ‘fiduciary’ advisors who provide advice only in the interest of the client.

Since real estate is an unregulated market and is burgeoning with the evils of black money that provide a haven for political money laundering, it is like the black horse, unaware and oblivious of its destination.

It is this ‘un regulation’ that does not provide a true valuation to property growth every year, and hence the investor is living in a fool’s paradise.

Has not property fallen in a block of 4-6 years and stagnated in value, thus resulting in negative returns for the same period?

Doesn’t property have costs of stamp duty, registration, broker fees, agreement fees, maintenance fees, “fill my stomach fees” that add to the cost of the asset, just like any other asset class?

Are investors really foolish, in saying, ‘my property has doubled in eight years’, when it can double in the bank or post office in the same time with virtually zero risk?

All this confusion and lack of clarity, is because there is NO proper index to measure, monitor and update investors on the performance of their property. Once in, most are trapped, unable to sell and find liquidity when monies are really needed.

Having said this, I am not suggesting property is not a good investment.

But the blind leading the blind attitude is what agonizes me to think, and retort when a sixty year old comes next time to seek advice on property, or a software engineer, seeks advice on buying his second or third home, with a loan, or if someone compromises on their life goals like retirement, by withdrawing from their retirement kitty to fund their dream farm house or when someone has a vehicle, credit card and car loan and still wants to buy a house!

Contributed by Dilshad Billimoria BBM, LUTCF CFPCM, Certified Financial Planner and Investment Advisor