I was pleasantly surprised to receive a call from Raj Gupta, who has been a close friend since my CA days. But bigger surprise unfolded when he told me that he had won an argument with his wife for the first time in life,  all because of me!

He was very excited, thanked me profusely for my article in DNA. ( Refer my article on October 3 – Buy another home…)  I was even more surprised to note that my advice can make people win an argument with their wives. ( A thing that I have personally never been successful at).

Naturally my interest level in the conversation rose. I was keen to know the details. He explained that for last few months he has been arguing with his wife over buying ready made farm house-cum-plot near Karjat, approx. 100 Kms from Mumbai. His  wife has been opposing the plan, closing that it was a luxury that they could ill afford at this point of time.

And my above article extolling the virtues of buying a second home helped him in convincing his wife that it was not a luxury purchase but an investment he was making for their retirement.  Raj said, “See, even Harsh supports my view”.  Hence Raj was extremely happy with the article. 

Paradoxically I need to clear this illusion not only for Raj but for all of you who have stretched my advice a bit too far. What my article really suggests is that buying another house which is capable of being rented out.  It can be a good retirement planning tool. Moreover it should not be important that whether you would have yourself liked to stay in that house or treat it as weekend gateway. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

But what Raj  was proposing is not in consonance with my suggestion, as a leisure property  could hardly be rented out on a continuous basis. Besides it is difficult to liquidate a leisure property as it cannot be sold easily thus becomes difficult to realize the value of such properties in India. Despite growing economy, FDI influx, rising urban incomes, reach of internet and many such factors, leisure property market is not very well developed in India. Moreover, there is lack of transparency at the operational level and so is the depth in such markets. Hence, getting resale value of a leisure property is very difficult, getting rental for the leisure property is even more difficult.

Let me add here that even the builders of such leisure properties have to rely on large marketing organization and marketing campaign to sell them and it is quite time and effort consuming process. This is not practical for an individual looking to sell his leisure property.

So should you never buy a leisure property? No, I am clearly not saying that, But it should not be bought, thinking it is a good investment. It should be bought from that part of your assets that are allocated to pay for luxury that most people are entitled to after achieving a certain earnings and savings status. Buying it under the mistaken notion that it is a great investment, could perhaps be a big financial mistake. In the event of any stress in your financial life, your ability to liquidate that leisure property quickly might be very difficult. But clearly all those of you who want to get away from all the distress around and connect with your families over the weekend, in a self-owned weekend gateways can positively impact your overall lifestyle and improve your earning potential. To that extent it can be considered to be well spent.

So I am not surprised that once again another wife has won the argument.

Alas! my friend Raj’s happiness was short lived. But then he, like most of us, is a good loser and gives in with grace when he knows he cannot win the argument.

Most people build a nest egg for their retirement by investing a regular sum of money into a Systematic Investment Plan (SIP) of a mutual fund or buy a pension plan from an insurance company or regularly invest in a bank recurring deposit or government backed instruments such as PPF and NSC, etc. A very few well-informed consumers are also opting for the newly launched New Pension Scheme.

But there is another very effective means to build a sizeable pension corpus - Buying another residential house for the purpose of deriving rental income as well as long-term capital appreciation.

I will illustrate this with an example.

Mr. Prabhat Varma has ability to pay a down payment of Rs. 2 lacs and can service an EMI of Rs. 6,000 every month (in other words he is able to save Rs. 6,000 per month).

This means that he can invest in a house worth Rs. 11 lacs for which he will be able to get a loan of around Rs. 9 lacs. The EMI for this 20-year loan at 9% is around Rs. 8,100 per month, which Mr. Varma will easily be able to pay from the rental income (estimated at around Rs. 3,000 per month), clubbed  with the existing savings of Rs. 6,000 per month. The tax deduction on the home loan (for rental properties the tax deduction will continue even under the new Direct Tax code) and any potential increase in rent in later years is just an icing on the cake.

Even if we assume a rather conservative 10% p.a. capital appreciation the property will be worth Rs. 74 lacs at the end of 20 years. Thus the easy availability of home loans even for residential property bought for the express purpose of renting it out effectively turns this investment into a SIP into real estate. 

While Mr. Varma crystallises his plan for another house purchase, he should keep few of these things in mind:  

1)      This is not about the house that you are staying in, the house in question here is  purely for investment purpose. 

2)      An investment horizon of at least 10 years is needed for this to be effective,  so if you are planning to retire by 60, and then this is not for you if you are already above 50 years of age.

3)      This is much riskier than a bank fixed deposit (the expected returns obviously are higher to compensate for the higher risks) and so if your risk appetite is low then this investment is not for you

4)      A meaningful Real estate investment will require much larger initial investments as also much larger continuing investments. Also the flexibility to miss an regular investment instalment is not available since the continuing investment is by way of loan repayment.

5)      It is not important that whether you would have yourself liked to stay in that house or not. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

6)      Investment in real estate is a relatively high maintenance investment in terms of dealing with societies, finding and dealing with tenants, etc.

7)      Though state and local laws are fast changing tenancy laws in some states and property taxes in some cities make renting out a property a non-viable option. So avoid investment in such areas.

So this investment proposition is ideal for the likes of Mr. Varma who like saving regularly in traditional assets such as real estate.

How about you? Are you like Mr. Varma?

I have always entered the stock markets, when scripts were overvalued and exited it,when they were near the rock bottom. My broker used to say that I lost money due to the “volatile markets” . Nowadays, I dread the word “volatility” so much that, I want it to pay for all my misfortunes. Finally I think my prayers have been answered in form of “Arbitrage funds”.

The arbitrage fund takes advantage of the difference in pricing between the cash and the derivative markets. Going long in the cash market and short in the futures market and vice versa. This hedges the risk and ensures that the returns are green in color.

But is that so easy? No it’s not! It important to spot the arbitrage opportunity in the market which is the forte of an efficient Fund Manager. The fund manager thrives on volatility in the market. So did the fund managers lap it up when market provided an opportunity to die for on may 18?

So how did the arbitrage funds perform on the Golden Monday?

The average growth of such funds for 2008-2009 was around 8%p.a. but the average growth for the month of May 09 itself is 5%. Hence, it clearly means that at the 5% growth rate, the average per annum growth will be 60%, This is stupendous, even if one compares growth rate of the best performing stocks in the share market. The arbitrage funds have proved that it performs best, when there is volatility in the market.

The arbitrage funds have proven to be a consistent performer over a period of time. The arbitrage funds gave a return of around 8% even when most other equity funds saw their net asset values (NAVs) falling by over 40 per cent.

From April 2008-09, when the net asset values (NAVs) of mutual funds declined by 30 to 50 per cent and the Sensex also declined by about 60 per cent, during the same period arbitrage funds have given returns of about 8.5 per cent. For arbitrage funds, stock prices are not significant but volumes in futures are of much more importance. In 2008-09, volumes in future trading were about Rs 85,000 core per day and now they have come down to about Rs 15,000 crore per day. For better returns in arbitrage funds, both volatility and volumes are required as they create more investment opportunities.

The most important feature of arbitrage fund is that it generates returns irrespective of whether the markets are in positive or negative. It’s gives returns regardless of the market situation. It’s a win win situation for the investors.

Although, the arbitrage funds are equity linked, the investors should not compare it with normal equity funds. The major difference is that the arbitrage funds are partially exposed to the equity market. They just take the advantage of price difference between the cash and the derivative markets. The arbitrage funds are low risk compare to the equity funds. Such funds render some stability to the portfolio and ensure positive returns in volatile times. It is advisable to allocate a small part of your portfolio to such schemes.

The only downside of this is that the investors are not realizing the potential of the arbitrage funds. The arbitrage fund’s Asset Under Management (AUM) saw a considerable dip during last year, when the investors were vary of any equity linked funds. A part of this can be attributed to the fact that some of the investors are not aware of the real benefits of the arbitrage funds. The other reason can be the investors inability to differentiate between normal equity fund and the arbitrage fund.

The arbitrage funds are a win-win situation for investors. It’s the exact remedy for the volatility in the market . An investor should realize this and make the most of it.

Now you know how to make most of the volatility in the market, get the arbitrage advantage and make volatility pay back to you.

More than “Kaun Banega Crorepati?‘, its time now to have a look at “Kaise banoge crorepati?“. Clearly every individual is not a Dhirubhai Ambani or a Siddharth Mallya who has either the entrepreneurial vision or an inherited business empire. It doesn’t really take a lot of effort to fulfill this dream of yours. This piece will show you that.

The three “to-do’s” of this not-so-tedious task would be

1. Start early
2. Be disciplined in your investments
3. Know the power of Compounding

The chart below gives you a better picture of how the above three mantra’s can be conveniently implemented.

* Interest Rates are without considering Inflation

*** Assuming retirement age is 55years

If you’re 30 years old currently, on a basic rate of return of 8%p.a. compounded monthly, you would need to save about Rs.10514.96 per month. However if your asset allocation in your portfolio is strong enough, over a span of 25 years, on an average if you could receive a 12% pa return, then would just need to save Rs.5322 per month. So sooner the better! Clearly, the way you allocate your assets will help you understand how much do you really need to save!

Ultimately its WE ourselves individually who need to be disciplined in our savings and its respective asset allocations rather than having a fancy investment plan or a disciplined product. Saving every month or quarterly in equal sums rather than lump sum amounts at anytime during the tenure will incur discipline in savings and avoid ad-hoc savings.

However, if one wants to understand what goes behind this, then here it goes… “The Power of Compounding” With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement. Yes! So Benjamin Franklin was right when he said it was the Eighth wonder of the world!

Difficult as this economic climate appears, I want to stress that this is still a very good time to invest. The third quarter saw a correction morph into a bear market and panic. Steep stock market deterioration was concentrated in late September and October. Extreme volatility is reminiscent of typical bear market bottoming, forming the classic V-shaped market. Many stocks today are at their 52-week lows, many below listing or IPO price, valuations higher than the market price!

But there’s an important hitch - we need to be much more careful in our stock selections. As long as we remain prudent investors, you and I stand to see massive gains in the weeks and months ahead. This is one of best profit opportunities of our lifetime.

Everything today looks good for a buy but does that mean we buy anything? I have listed below four simple fundamentals that you need to look at when buying in these volatile markets.

The Best Measure: Return on Equity (ROE)

The foremost thing you need to do is zero in on a company with high ROE. This is a benchmark to find the efficiency of the company. This measure will actually tell you how much profit a company is making on the equity it has. ROE is a report card for a company’s management. We can’t always know what management is up to, but by analyzing a company’s ROE, it lets us know how prudent they’ve been with their shareholders’ money. Management should never forget exactly who it is they’re working for. An ROE number above 15% is good, and anything above 25% is outstanding.

Avoid Companies that Spend More than They Earn

Next to look for are companies with strong cash flows. Examine a company’s cash flow because it’s something that’s hard to manipulate. The simplest definition of cash flow is earnings plus depreciation. What cash flow tells us is how much cash is coming into the company from its business compared with the amount of cash going to fund its operations. The problem is that some companies generate a lot of cash, but they require even more to keep things going. Whenever we see that, we should know it’s not a good sign. By looking at cash flow, we can cut through the thorns and see how healthy a company really is.

Companies with Big Profit Margins

The third step is to find stocks with expanding operating margins. This is very important because it shows us a company that can grow its earnings faster than its sales. When a company has growing operating margins, it usually means the company has pricing power in its market. That’s crucial in this economic environment. More often than not, such a company can grow its profit margins because it has a dominant niche in its market.

Outperforming Other Stocks

The final step in spotting winning stocks is to find companies that are having their earnings estimates revised higher. Beating earnings expectations is great, but we also want to hear a company say that future earnings are going to be better than expected. Spotting earnings revisions is a great way to uncover value stocks before the crowd does.

I hope my readers would now look into these four fundamentals discussed above before buying or selling stocks.

Kirtan Shah, a Certified Financial Planner, is a partner at AmbestinQ Consultancy Services.

http://economictimes.indiatimes.com/Personal_Finance/Insurance/Insurance_news/IRDA_message_reposes_faith_in_local_insurance_cos/articleshow/3538435.cms
AIG is on the brink of filing bankruptcy. It has shaken the Indian insurance markets to a very great extent. AIG is a major share holder in Tata AIG general and Tata AIG Life insurance. The question being asked by people is safety of the money invested by them in Tata AIG, and policies they bought from the same company.

Insurance in India is a highly regulated industry. Any company that wants to set up an insurance business has to follow very stringent norms given by the Insurance Regulatory & Development Authority (IRDA).

If anyone is tense about investments in any insurance companies like Tata AIG, rest assured, they need not worry about the same. IRDA has prescribed the norms of solvency margin of 150% for all insurance companies including private players. It also imposes that no insurance companies should be investing overseas and that their investment portfolio should be in sync with the norms laid down by the IRDA.

The regulator has taken into consideration policy holders’ interest and is committed to maintain financial stability in the insurance sector.

Tax is the most terrifying word for one who needs to pay it. There are many provisions in the IT act by which you can plan and minimize your taxes. One of the provisions through which one can reduce tax liability is by taking deductible from gross income to the maximum limit of Rs.100000 under Section 80C of the Income Tax Act. This can done by investing into life insurance policies, PPF, equity-linked saving schemes etc.

So where to invest to get deduction under Section 80C?

Let’s look at some basics and then we would be in a position to compare them:

An Endowment Policy is a traditional policy which has a risk cover policy for a specified period. At the end of the policy tenure the maturity benefit is paid off. The maturity benefit in this regards is the sum assured and the bonus accumulated during the term of the policy.

A term policy as the name suggests covers the risk for the particular term selected. It is the cheapest of all the life insurance policy, as it is the purest form of insurance the premium collected will not include any investment element in to it.

Public provident fund (PPF) there is a lock in period of 15 years with a minimum amount of Rs.500 and maximum of Rs.70,000 to be invested every year. PPF earns 8.00% p.a.

Equity linked savings schemes (ELSS) are basically a tax saving tool; which safeguards an investor from the short term volatility of the market. As it has a lock–in–period of 3 years. It is a high risk, high return investment. The asset allocation of an ELSS would ideally be 90–98% equity exposure and the balance may be in money market or government security. This makes an.

In an endowment policy the liquidity is blocked for the tenure of the policy and you miss out on the opportunity of booming economic conditions. One more negative which is associated with the endowment policy is that the bonus which is declared in the financial year is not compounded and investor is paid only the actual amount of bonus received in the subsequent financial year at the time of maturity. In case you surrender your policy you get a surrender value after paying a certain surrender charges for it.

On the other hand if you purchase a term policy along with a PPF or a term policy along with ELSS you will get a better return on your investment as compared to an endowment policy.

Let us understand with an example. If you take an endowment policy with a sum assured of say Rs.10 lakhs for tenure of 20 years. The annual premium payable would be Rs.47,000. If you buy a simple term life insurance policy for the same sum assured i.e. Rs.10 lakhs for 20 years the annual premium payable would be Rs.2920. The balance of the premium i.e.Rs.44,080 (47,000 - 2920) if invested yearly in PPF for 20 years at 8%p.a. the accumulated amount would be Rs.20,17,187. In other case if you invest the difference of the premium i.e. Rs.44,080 on a yearly basis in ELSS which gives you a compounded annualized growth rate of 12.00% p.a. the accumulated amount would be Rs.31,76,072.

A risk-averse investor should look in for a term insurance along with a PPF option. A risk-liking investor should look in for a term insurance along with an ELSS option since ELSS is more aggressive - its inclination is mainly into equity investments which yield better returns in a longer tenure, beating inflation.

Personal loans are gaining popularity among loan seekers in a big way. Be it planning a vacation or getting you daughter married, down payment of your new house or medical obligations, a personal loan may be used for any purpose. A personal loan may be a secured or an unsecured loan where the end use of the money is not supposed to be declared while taking the loan. The rate for unsecured personal loans ranges from about 15 % to 25 % per annum depending up on the credit history and the income of the loan seeker. This type of personal loan is more popular among the public.

The problem begins when people take these kinds of loans for investments into various instruments including equities. Markets have been pretty volatile for last few months and are expected to behave the same for quite some time. So if you planning to take a personal loan and invest in to equities of mutual funds thinking that the markets are at low then think again. The inflation rate has been moving up. The last numbers posted was well above 12%. With the growth in the Gross Domestic Product (GDP) around 8% to 9% the economy may see a negative growth in the current fiscal. The Reserve Bank of India has tried to tighten the liquidity situation by increasing the Cash Reserve Ratio (CRR) by 50 basis points. They may increase it by another 50 to 100 basis points if needed to keep a check on the inflation numbers. The condition worsens if the loan you have taken is on a floating interest rate. You end up losing money in the equity markets and pay more towards the loan at the same time. This is like being the rope in a tug of-war match where both sides are trying to pull you towards themselves to the fullest.

A better way to invest into equity market is by the way of arbitrage. It is buying in the cash market using the loan amount taken and selling it in derivative market by way of futures at a price which is more than the price bought added with the interest amount. On the day of maturity you reverse your position on both the markets and difference of the amount over and above the cash market price added with interest on the loan and the price sold in the futures market is your profit.

To explain arbitrage lets take the following example.

One lot of Reliance Industries Limited (RIL) is of 75 shares. Suppose the price of one RIL share is Rs. 2200 on 1st July, 2008. The maturity is on 31st July, 2008. The total amount of loan of 75 shares is (2200*75) = Rs. 165000. If the interest rate is 18% per annum then for one month the amount of interest is (165000*1.5%) = Rs. 2475 which is (2475/75) = Rs. 33 per share. Thus you need to short one lot of Reliance at any price which is more than (2200+33) = Rs. 2233. If you manage to short at a price say Rs. 2250, then you make a profit of (17*75) = Rs. 1275 on one lot which is almost 9.3% per annum. Now no matter what the price is on the expiry, you will manage to earn the amount stated above as you have already squared off your position.

The main thing over here is to find the right price to buy in the cash market and sell in the futures market. If you manage to hit the right price over the screen, then bingo! You have made money where everyone is losing it.

What are Monthly Income Plans?
Monthly Income Plans or MIPs are mutual fund products designed with the objective of giving a regular return (in the form of dividend) in addition to capital appreciation to investors. The periodicity of return depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly, yearly and growth options. Investors, who choose the growth option, are not entitled for a return by way of dividend, but gains in the form of capital appreciation.

To realize its investment objective (of providing regular dividends), an MIP has the option to invest some portion of its assets (about 10-25%) in equities and the balance in debt and money-market instruments. Having exposure in debt and equity an MIP takes benefits of both equity as well as debt markets.
Since MIPs have a higher debt component, these schemes are categorised as debt-oriented hybrid funds.
However, like any mutual fund products, returns in MIPs are market-driven and dividends are declared out of the available distributable surplus only. There is no guarantee of a monthly income distribution.

How is it different from the income funds and bank FDs?

MIP vs. Income Fund:

• MIP has an option of investing a small portion in equity whereas an income fund invests only in fixed income securities i.e. corporate bonds, govt. securities and money-market instruments like Treasury Bills, commercial papers, CBLO etc. In a booming equity market, MIP with its small equity exposure rides along the trend, while income funds can’t cash on the same.

• Though income is not guaranteed, still MIPs strive to provide regular dividends as per the option of the investor. MIPs manage to do so due to the small equity portion which acts as a kicker. On a sustained basis a pure income fund would be hard pressed to distribute monthly dividends.

To present a more realistic picture, during the last few years, the average return of an MIP has been 12% p.a. as against 7% of an income fund.

MIPs Vs Fixed Deposits (FDs) of Banks:

• Returns on fixed deposits of banks are assured whereas there is no assurance on the returns on MIPs.

• Amount invested in FDs are locked-in till the term of the deposit. If withdrawn pre-maturely, then penalty is imposed on the investor. Partial withdrawal of amount is not allowed. Whereas, investment in MIPs can be withdrawn on any business day at the prevalent NAV. Even partial withdrawal of amount (units) is allowed subject to the minimum amount of investment in the scheme.

• Returns on FDs are low compared to MIPs owing to the difference in the asset allocation pattern.

• MIPs are more tax efficient than FDs. Dividends declared under MIPs are tax-free at the hands of the investors. Income from bank FDs is taxable as “income from other sources” and is taxed depending on the tax bracket of the individual. Further, if the interest income exceeds Rs 5000/- in a financial year, then TDS is applicable.

To compare the returns of FDs as against MIPs (as on 31st March 08), yield on FDs of State Bank of India (considered as risk-free return) for 1 to 3 years period were in the range of 6 % and 8.5 % p.a whereas annualized return generated by MIPs for the above corresponding period have been around 10 to 14%.

Who should invest in MIPs?

• Investors in the age group of 50+ years: MIPs are suitable for conservative investors who want to earn marginally better returns than a debt-only portfolio. Conservative investors generally remain invested in fixed income instruments, but sometimes they need returns that are above the inflation by a few points. Equity exposure is the best way to provide this meaningful return over the inflation. An MIP typically invests bulk of its assets in debt, while a small equity exposure is maintained to earn a slightly higher return.

Typically, an investor who is either past his/her retirement or is nearing it may consider MIP as one of the many options. To that extent, MIPs suit the investor profile of a retiree/semi-retiree where the monthly/quarterly/half-yearly/yearly income from the scheme helps to meet their regular expenses.

• Investors in the younger age group, HNIs, institutions, and trusts: In the regime of lower interest rate, growth option of an MIP scheme becomes attractive. At present, risk-free 1 year bank deposit offers maximum rate of 9.5% per annum. Returns from MIPs will definitely yield higher if the interest rate continues to remain low. Investors in the younger age group, HNIs, institutions, and trusts etc. do not require a regular monthly/quarterly/half-yearly/yearly dividend inflow. However, capital appreciation with a controlled level of risk is an extremely important parameter for investment. The controlled equity exposure of 10 - 25% over the medium term should generate higher returns, compared to a pure debt fund, albeit with a slightly higher level of risk.

Last words
Like any mutual fund product, there is no assurance that an MIP will declare dividends regularly though they strive for the same. It becomes difficult for MIPs to keep up the regularity when the equity markets remain volatile for longer periods. In such a scenario, investors can have the option of switching into the growth option under the same scheme with a SWP (Systematic Withdrawal Plan) facility. However, a comparative study of some of the MIPs shows that despite skipping declaration of dividend for some months, the return given has been far superior to other comparable debt investments.
MIPs can be positioned aggressively to the people nearing retirement. These people would like to save so that on retirement they would get a steady flow of income at a higher real rate of interest (approximately Rate of interest minus inflation) to meet their regular expenses at the same time have capital appreciation.
Given its wide-ranging appeal to conservative and aggressive investors, MIPs have the potential to be very much there to cater to these segments. Further MIP not only offers stable returns but also provides additional incentive of higher returns (should the equity portion do well).

The author is a Fund Manager in LIC Mutual Fund.

Often people talk about asset allocation within various investment classes like equity, debt, real estate, gold etc. Your financial advisor draws up the plan for you and you sit very comfortably with an asset allocation of 60 – 30 – 10 which means 60% of your portfolio goes in to equities, 30% in to debt and the remaining 10% in gold. For debt you invest into post office or you buy fixed deposits. For gold you go and purchase gold biscuits or ornaments from the markets. Now the question here is how to go about the 60% of the portfolio which is supposed to be invested in to equities according to the financial plan. Buying equities is not as simple as buying gold and or buying fixed deposits.

The first step to be taken here is to decide if you want to invest directly in to equities or want to go the mutual funds or the portfolio management services (PMS) way. The minimum investments in to mutual funds are around Rs. 5000 whereas in PMS it is Rs. 5 lakhs. If you are not very comfortable with ratios and balance sheet then the best option is to leave it in the hands of experts. Mutual Funds or PMS are the best way to go for you.

But before you invest in to mutual funds, PMS, or directly invest in to equities you should think if you should invest in to large caps, mid caps, small caps or a mix of all of them. The risk return matrix of the equity classes can be explained as follows:

Large Caps – established companies, successful business model, so low risk, low returns
Mid Caps – yet to prove themselves but already in the process – riskier than the large caps, so returns will be higher
Small Caps – new entrants in the markets, they are called the babies of the markets – high risk, high returns.

The asset allocation to be done within equities has a lot to do with the risk taking capacity of an individual and doesn’t depend too much on the time horizon of the investments even though the time horizon can’t be completely ruled out.

Comfortable time horizon for each equity class:

Large Caps – 3 years and above
Mid caps – 5 years and above
Small and Micro Caps – 7 years and above

Before drawing up an asset allocation within the equity classes it is very important to draw up your risk profile. You should contact your financial advisor for the same as it is a very sophisticated process and a simple mistake in the process can lead to defeating results. Mutual funds and PMS products are available in all the mentioned equity classes. You can visit various personal finance sites to see the best of mutual funds in each category. Your financial advisor can help you to choose the best mutual funds in the industry. In case of PMS the providers usually have products for each class. You can discuss it at length with the provider.

The author is a Research Analyst working at Apnaloan.com Services (P) Limited.