Whats Your Investment Bucket Like?

Khushru Kanga,
Director, Kanga Financial Services (P) Ltd.

The current economic situation is such that even veteran investors are uncertain when it comes to the market and economic outlook. At such times, the plight of an ordinary investor can be well understood. Following are some of the investing aspects to be mindful of especially by a conservative investor for whom capital erosion is anathema while on the path to achieving his investment goals.

Cash Flow Management

At a time when there is job uncertainty, wage reduction and meeting probable medical emergencies related to the corona virus being paramount concerns, a good and feasible starting point would be revising one’s household budget. It is imperative to rigorously monitor expenses and both cash inflow and outflow on a regular basis. When it comes to an investment portfolio, following are some of the measures to be considered:

Making Investment Buckets as per Goals or Tenures

1) Fixed Income Investments

a) The first bucket should consist of an amount which equals a year’s household expenses plus medical emergencies. This investment can be in the form of a bank fixed deposit or can be deployed in a liquid or ultra short term or savings fund and the like. Here, the main priority is safety and liquidity with returns being secondary.

b) The second bucket should consist of fixed income investments but with income generation capabilities and be considered as a part of asset allocation. Mutual fund investors can consider funds with which are majorly invested in AAA assets or highly rated AA+ or AA instruments of shorter maturities (18-24 months). Banking and PSU funds, short-term funds, corporate bond funds are some of the debt fund categories one can consider investing in.

c) As a means of regular cash flow from these instruments, opt for a systematic withdrawal plan (SWP). Here, one should be careful that only the capital appreciation part is withdrawn. Also, this approach is very tax-efficient. On completion of one year of investment, capital appreciation withdrawal is taxed at about 2 per cent. At the end of the second year, capital appreciation withdrawal is taxed at about 5 per cent. From the third year onwards, indexation ensures that tax payout is minimal.

For individuals in the lower tax bracket, high-grade company fixed deposits, LIC’s Pradhan Mantri Vaya Vandana Yojana Scheme, Senior Citizens Savings Scheme 2004, Floating Rate Savings Bonds (2020) and other such government savings schemes can be considered for investment. Remember, the primary purpose of debt investment should be to meet emergency funding, asset allocation and additional income generation, if needed.

2) Equity Investments : When it comes to equity investments, historically, maximum gains are made during uncertain or volatile periods in the stock market. For example, those who invested in equities during March or April 2020 have already seen handsome gains in their portfolio. But before jumping on the equity bandwagon, an individual should be aware of one’s risk-taking ability. Also, such an investment should be left untouched for the next 5-7 years.

For first-time investors, following are some of the thumb rules or guidelines to be aware of :
✓SIP or STP route may be used to average cost of investments.
✓Consider lump sum investments during market downturns.
✓ Investors who may not require fixed income earnings can consider investing those gradually into equity funds in order to boost overall portfolio returns.
✓ Extremely risk-averse investors may invest in equities through asset allocation and  balanced advantage category of funds.
✓ Slightly more aggressive investors may invest in equityoriented hybrid funds.
✓ Those seeking equity investments can consider investing in any of these categories – large-cap, multi-cap, mid-cap or small-cap fund.
✓ When allocating assets within equity space, be aware of risk tolerance. Investors with risk-taking ability can consider the following mix of funds: 60 per cent in large-cap or multicap funds; 20-30 per cent in mid-cap funds and small-cap funds; 10-20 per cent in international funds. Those seeking market-linked returns can opt for index funds.

3) Gold : Even though gold as an asset class has performed well over the past two years, we are not in favour of this precious metal. For someone looking to make an investment in gold, Government of India’s sovereign gold bonds, gold ETFs and gold mutual funds are some of the options that could be taken into account.

The writers is a Director, Kanga Financial Services (P) Ltd.
Email id : kangafinancial@gmail.com