Let’s understand the power of asset allocation and planning, says finance entrepreneur Balaji Rao
Are you amongst those who leave hefty balances in your savings account for longer periods of time? If your answer is yes then you are amongst the most financial illiterates of the world.
While a savings account gives you an annual interest of 4% (pre-tax) the unutilised amounts that you leave there is being efficiently used by your respective banks which allows them an opportunity to earn at least 8% p.a.
This is by deploying such funds in various Money Market instruments. Your ignorance gets converted into a profitable opportunity for the banks that maintain ‘your’ hard earned money.
American author and futurist Alvin Toffler has said “the illiterates of the 21 century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn”.
It is not that the banks or the Indian Financial System hasn’t helped to create opportunities to manage your idle monies, there are in plenty.
But how much effort are we putting in knowing them is the million dollar question. Banks have Sweep-in Savings Accounts, Flexi Deposits, Savings Plus among other opportunities that assist you to move your idle funds from savings account to term deposits of shorter or medium term durations.
Such flexibility provides you to earn better returns than what a savings account would offer.
Other than opting for sweep-in facilities you could even choose to invest in Liquid Funds or Ultra Short Term Bond Funds (money market oriented funds) that are exclusively designed by mutual fund companies that facilitates idle money investments.
If your horizon of staying invested or parking your idle funds is for a period ranging from one day to about three months, these funds are highly recommended. The biggest advantage of such funds are that it offers amazing flexibility in withdrawing your investments in smaller denominations and you could even park your idle funds for as short as one day!
Liquid mutual funds offer returns that are in line with the Call Money Rates (a money market instrument that is of the shortest investing tenure with least risk) which currently are in the levels of 7.10%, nearly double the rate of return compared to savings account rates. Consulting a financial advisor would offer you more understanding of the fundamentals of investing in such liquid mutual fund schemes. Further, let’s understand the power of asset allocation and planning for creating a down payment for a home loan or home renovation or buying home decorating items or even investing in a farm land as your retirement home.
Most of us keep investing our monthly surpluses in recurring deposits (RD), fixed deposits (FD), stocks among other organized and unorganized opportunities.
During the course of such investments we would have built a corpus out of the accumulations. For example, if you have been already investing an amount of Rs.5000 a month in a RD for a period of 5 years at 9% annual interest, then at the end of the tenure you could have Rs.3.80 lakhs with you.
What should be done with that accumulation? We either spend on some events or reinvest that money in some other opportunities.
Assuming you would like to build a corpus to extend your existing house or you would like to create a sizeable corpus as down payment to invest in a house/apartment or you would like to carry out some major renovation work at your house, how would you plan to create a handsome amount of money in a period of 5 years?
You could use an asset allocation based investment pattern to create such a corpus in five years time. It allows you to spend on your dream project or a long pending investment. From the available Rs.3.80 lakhs if invested in a mix of asset class such as equity, gold and debt, you could achieve an indicative returns in the range of Rs.6.82 lakhs to Rs.7.00 lakhs. Look into the illustration for such a possibility.
There are plenty of mutual funds with proven track record and choosing even defensive themes such as Balanced Funds (a mix of equity & debt instruments) and Large Cap Funds (investing in large-sized companies) from renowned fund houses such as HDFC, Birla, Franklin Templeton, DSP Blackrock, SBI, UTI among others would be a good choice to create such corpuses.
Choose an asset allocation based investing route and also manage your finances with far-sightedness, it surely would help you in being a prudent investor.