Asset allocation for a new investor
If you have come into investing recently and have been subject to many experts, my sincere condolences. It is a jungle out there and there is an alphabet soup of qualifications – all most all well intentioned, presumably!
- first realize that life is a complete package,
- when you are young and drawing your first salary, the biggest asset you have is, your ability to earn well over the next almost 40 years
- If you have a job in the government or even some big old company, your job is like a DEBT fund. Low volatility, maybe not great returns, but that you know best.
- Once you treat your job like a debt fund, remember your wealth creation will happen through Equity. Pick up a few equity funds and start an SIP.
- If you are an employee of a Venture Capital fund / Private Equity advisory fund / Equity broker – your life becomes like an equity fund. In such cases it is necessary for you to start investing in debt funds ALSO. You still need to be 20% in equity funds, and the balance in debt funds. As your salary goes up increase your exposure to private equity, listed equity and equity mutual funds. Remember private equity is high risk and has no liquidity.
- Not all debt is equal – Public provident fund has poor liquidity, but high on safety and is tax free accumulation at 8% – and is a good return. HOWEVER till you turn 50 years of age do not put too much money into the ppf account
- Whether you choose Equity or Debt schemes make sure you opt for the Growth option. In such a mode you pay tax ONLY when you withdraw.
Renga
Dear Subra Sir, any specific reason why you said not to put too much money into ppf given govt sets the max limit each year and we can put only to that max limit?
subra
ELSS is a better option for the younger investor. After you have put in own pf, elss, school fees, etc. there may not be much left for investing in ppf.
Rajan
When I started earning in 2011, I started doing sip in ELSS. over 4 years I have increased it to 4 times what I started with in my first year.
IamNoSpecial
Superb and timeless advice. I would not be surprised if you do a copy-paste of this article in 2025 or something and it still would be relevant.
Vivek Hingorani
Couldnt understood the last line (taxes one) If we keep the mutual funds for over a year then at the time of redemption are we eligible for tax?
IamNoSpecial
@Vivek: You can chew this till the experts chip in:
In case of equity fund, the redemption is tax free (if the units are held for more than 1 year)
In case of debt fund, the redemption is taxable as below:
1. If held for less than 3 years, tax is as per the slab
2. If held for more than 3 years, tax is indexed and at a rate of 20%
Compare this with bank FD. They are taxed each year, even if you plan to renew it year on year basis.
All this is for growth. In case of Dividend, there is DDT involved.
Hence, the line that: “In such a mode you pay tax ONLY when you withdraw”
Rohit
Thank you for this blog post. Since a couple of days I am trying to find ways to invest in Private Equity and am not coming up with any concrete solutions and ways to do so. Could not find it on your blog either.
If possible could you elaborate in your blog as to how a small investor can invest in PE or non listed companies?
subra
Vivek if u are in a debt fund in which u invest from age 47 to age 65, you pay tax after 19 years not yearly
shankar
Problem is that most working in debt fund like govt co’s are also invested in low risk assets like bonds and those in high risk – high paying jobs have investments which are high risk too.