There is No Fate But What We Make: January 2009

Saturday, January 03, 2009

Importance of Asset allocation

Investing according to an Asset allocation plan and sticking to your plan is so hard when you are bombarded by noise from newspapers, loud TV channels, tips and "research" articles from brokerage houses, tips from friends and colleagues and of course, blogs such as this. So I thought I'll share some my asset allocation information.

This is at the beginning of 2008.

This is at the beginning of 2009.

The changes were mainly due to the 50% downward market movement. Also, it was a conscious decision to increase the commodity part to 4%. The real estate part increased not due to an appreciation of market value but due to outstanding principal going down as I paid off EMIs. I created a 4.5 Lakh emergency fund and that contributed to an increase of debt percentage. A good chunk of incremental investment goes into debt, whether I like or not (PF, Employee Superannuation, LIC policies).

The general market is down more than 50% and yet my networth has held almost steady. This cannot be explained by the incremental investment in the year 2008 as it represents only 10% of networth. It can be explained by simple principles of asset allocation and diversification.

Based on my risk profile and financial goals, I had decided to have 45-25-25-5 split among equity, debt, real estate, commodity. I would like a higher equity % and a lower real estate %. However, I have to take into consideration the large ticket sizes of real estate investments (in the absence of real estate mutual funds for retail investors in India) and the compulsory debt investments such as PF and Superannuation.

As my current asset allocation is far from my target, this is what I will working at. Increase the equity portion and decrease the debt portion. I won't be able to control the real estate part so much due to the large ticket size. So the future incremental investments will be skewed towards equity. Not that I haven't done so in 2008. But due the need of building an emergency fund and market conditions, the equity % went down.

The point is - we tend to take more logical decisions when they are based on our personal financial profile & asset allocation rather than the noise around us.

Thursday, January 01, 2009

Insurance cover for Terrorism

Terrorism cover of 5 Lakhs cover for 99/- a year

It's a group insurance policy from Oriental Insurance co. of India.
Do check the exclusions and the terms and conditions.

Purchase is online and you can generate and print the policy contract note.

This cover is no way a substitute for life insurance. A term life insurance of adequate cover should be taken. A term life insurance covers death by any reason, including terrorist incidents (well, it does exclude suicide in the first year).

Benchark ETF S&P CNX 500 Fund product

It's unlikely your financial adviser talked to you about the Benchark S&P CNX 500 Fund product. It has been launched recently.
Here's more on this:

It's a complete market Index product, ideal for the equity part of your asset allocation. As it is an Open fund, it will be available for buying and selling just like any other fund. Watch for expense ratio and tracking error. Both should be extremely low (upto 0.5% can be tolerated)

Update on Jan 20th, 2008 - Thanks Sandeep for that.

Investing in Gold asset class

A portfolio should consist of diversified and uncorrelated assets. To that end, investing in gold (and commodities in general) should be part of portfolios of 10 years or longer duration. 5% of networth can be kept in this. (Of course a portfolio depends on many factors but here we are talking about the median portfolio).

How do we invest in gold ?
Indians have a voracious appetite for gold. In fact, Indians are probably THE largest consumer of gold. So it's odd to suggest to Indians to invest in gold.

The issue is Indians buy ornamental jewelery and there's a huge cost of acquisition/ownership with ornamental jewelery -
1. Making charges
2. Wastage
3. Taxes
4. Locker charge
This is akin to entry loads and expense ratios for mutual funds. I analyzed jewelery purchase from a leading place in Bangalore and the "entry load" is nearly 40%! This pales the entry loads of even many ULIPs! There's also a risk of theft, loss and impurity with jewelery purchases.

A much better option is to invest in Gold ETFs. An AMC pools in money from retail investors and keeps gold of certified purity. The entry load is just the brokerage (typically 0.25% to 0.75%). The annual expense ratio is about 1% and it certifies purity and insulates against theft and such losses.

Someone asked me about DSP BR World Gold Fund.
DSP BR World Gold Fund is a mutual fund that invests a part of its corpus in shares of companies involved in gold business such as mining.

The returns from this and Gold ETF are correlated but not exactly the same.

If the goal is to hedge portfolio risks by keeping a part of your assets in gold, Gold ETF is what you should invest in. It tracks gold prices better and has lower expense ratio. It also avoids company specific risks. I cannot think of a single reason for opting for DSP BR World Gold Fund
over Gold ETF.

There are two Gold ETFs available in India:
Benchmark Gold ETF

To choose between the two, consider the following:
1. Pedigree of the AMC
2. Expense ratio (lower, the better)
3. Asset size (larger, the better as it distributes the fixed costs over a bigger pool)