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Investors with basic or no knowl-edge about investing often facethe dilemma about where they

should invest their hard earnedmoney. The usual options they haveare stocks, bonds, FDs, gold etc. Suchdilemma is not unusual and at timesis also good. After all an investorwith such a dilemma is less likelyto commit grave mistakes while in-vesting. He/she would rather beconservative than reckless.

At times investors do take the ini-tiative to learn the tricks about howand in which assets they should dis-tribute their funds. They could alsotake the help of an experienced andregistered financial planner or ad-visor to do the same for them.

DYNAMIC ASSETALLOCATION FUNDSTo lessen the burden of thoseinvestors who want to goalone some mutual fundhouses have launchedschemes which allocatefunds across stocks anddebt, and in some casesa small portion in gold,as per some pre-set cri-teria or at the discre-tion of the fund man-ager. These funds arecalled dynamic assetsallocation schemes.

HOW IT’S MANAGED A dynamic asset al-location plan isthe one in whichthe fund manag-er has the free-dom to changethe proportion

of these assets as per his/her viewof the market condition, mainly thedirection in which the prices ofthese assets could move in future.Alternately fund houses also setsome criteria, like price-to-earningsratio, rate of inflation and the ex-pected direction of the same, the

yield on the 10-yeargilts etc. to switch be-

tween assets. Accordingto financial planners and

advisors, investing in sucha fund could be a better op-tion for an investor who istrying to decide the perfectasset allocation himself/her-self but lack the required ex-pertise.

Dynamic asset allocationfunds are very flexible abouthow much they should in-

vest in which assets. If the fundmanager thinks or the pre-set datasignal that the equity market is ex-tremely over-sold and a bull rallycould start anytime, they could shiftall the money they manage intostocks. In this case there will not beany allocation to debt or gold. The

reverse is also true:If the signals are thatthe end of a bull run isnearing, the fund wouldshift all their money intodebt and may be a smallpart in gold too, financialplanners and advisors say.

DYNAMIC ASSETALLOCATION VS BALANCED FUNDSThere is a fundamentaldifference between a dy-

namic asset allocation fund and abalanced fund. In most balancedfunds, the equity portion will never

fall below 65%. This is done for bet-ter tax efficiencies. On the other

hand, dynamic asset allocationplans are not restricted by such

rules. So in these funds in thesearch for higher returns,the investor may have topay a bit more tax than apure balanced fund. So ifyou are invested in a dy-namic asset allocationfund, and get a post-taxreturn that’s higherthan what you get in abalanced fund, you area winner.

ROLE OF GOLD Given Indians’ affini-ty for gold, some dy-namic asset alloca-tion plans allocate a

small portion of theportfolio in gold,which is used as ahedge against in-flation.

Manpreet Singh replies

Your goals need to be infla-tion-adjusted till you re-

tire. We assume a 6% annualrate of inflation. So your re-tirement corpus of Rs 2 croretoday should be Rs 10.8 crorein July 2046. For your house,given the present real estatemarket conditions, there maynot be any increase in pricesin five years. So we keep it atRs 1 crore only. For your trav-el & vacations, you wouldneed about Rs 13.5 lakh pa forat least 15 years post retire-ment, assuming a life ex-pectancy of 75 years. Till re-tirement you would need Rs1.7 crore for which an SIP ofRs 3,000 pm should work.

We suggest you invest thefunds in your savings ac-

count in liquid funds yield-ing returns comparable to 1-year bank FDs.

Your PPF should be re-placed by ELSS since com-pared to the current PPF re-turn of 7.9%, ELSS couldgenerate 12-15% return. Apartial withdrawal from yourcurrent PPF balance of Rs 7lakh could be used for downpayment of your house.

Since you are already in-vesting in a pension fund, Isuggest you invest the Rs 10lakh in your FDs in balancedfunds which could give youtax free returns of 10%+.

Based on your earnings,your current life cover is toolow. You should have a lifecover of at least Rs 1 crore.So go for a term cover.

Also at this age (accumula-

tion phase) you don’t need adividend option in your MFs.So go for the growth option.Also you should keep moneyin liquid funds instead of inpost offices. The maturityamount from your NSC andKVPs should be used fordownpayment when you buythe house.

Your investments of Rs15,000 pm in NPS is too highsince it has lesser liquidity.My advice is use SIP in MFsfor retirement planning. Forexample Rs 15,000 in an SIPfor 29 years at 15% pa returnwill give you a corpus of Rs 7crore. If the SIP amount isenhanced to Rs 18,000 pm,your retirement goal of Rs10.8 crore could be achieved.

Manpreet Singh runs SantConsultancy, Panipat

R Raja

Having discussed the roleof emotions and our

inability to moderate theirinfluence in the last twoissues, it is time now todiscuss a few biases thataffect our investmentdecisions.

In investment, we may behard-wired to focus on shortterm. We tend to live in aworld without later. We live in‘permanent present’, trappedforever in the perpetual now.It’s like a world without end, atime without later.

Time__the duration forwhich an investment will be

held, during whichinvestment results can bemeasured and judged__iscrucial to any successfulinvestment program becauseit is the key to getting theright asset mix.

Time transformsinvestments from leastattractive to most attractiveand vice-versa. This isbecause while the averageexpected rate of return is notat all affected by time, itsubstantially changes therange or distribution of actualreturns around the expectedaverage. Given enough time,investment that might

otherwise seem unattractivebecome highly desirable andvice versa.

The longer the time overwhich investments are held,the closer the actual returnsin a portfolio will come to theexpected average. The actualreturns on individualinvestments, in contrast, willbe more and more widelydispersed as the time periodlengthens. As a result, timechanges the way in which theportfolios of different kinds ofinvestments can be used bydifferent investors in differentsituation with differentobjectives. Investment basedon genuine long-term

expectation is so difficulttoday as to be scarcelypracticable.

Two competingexplanations as to whyconsumers have trouble withfinancial decisions aregaining momentum. One hasto do with financial literacy.The other is about investors’impatience. In the next articlewe will deal with these issues.

R Raja is with a leading domestic fund house

Yours Behaviourally is amonthly column on psychology

that impacts our investmentdecisions

DEMYSTIFIER

CASE STUDY

All financial goals mustbe inflation-adjusted

I am a 31-year old single woman, a government employee. My current take-home salary isRs 70,000 perr month (pm), expenses are Rs 25,000 pm. I have no liabilities and my parentsare self-dependent. Myy current investments and savings are: SB accounts: Rs 13 lakh, PPF: Rs 7 lakh (I investRs 1.5 lakh pa), FD: Rs 10 lakh (to mature in 2018), Life insurance policy: Premium of Rs25,308 pa till 2020 (SSum assured: Rs 3 lakh), MFs: One SIP of Rs 2,000 pm since February2015, one lump sum payment of Rs 1 lakh and one of Rs 2 lakh in ELSS (Dividend income ofabout Rs 20,000 pa), Postal savings account:: Rs 50,000, NSC and Kisan Vikas Patra: Rs 3lakh each (since January 2017) and NPS: Rs 9.5 lakh (conntributing Rs 15,000 pm)Kindly suggest how I should plan my investments to achieve these major finanncial goals:Retirement corpus: Rs 2 crore (Retirement in July 2046), a house in Mumbai costing Rs 11 crore by 2023, Rs 2.5 lakh per annum (pa) for travel and vacations and adequatehealth cover. - R Bhattacharya

WHAT’S GST NETWORK (GSTN)?Swatantra Kumar explains: As India progresses towardslaunching Goods and Services Tax, the country’s mostambitious tax reforms in decades, the IT backbone that hasbeen set up to make the GST process smooth, is called theGST Network (GSTN). It’s a non-for-profit company inwhich the central government holds 24.5% equity in its Rs10 crore paid up capital, while all the states and unionterritories together hold another 24.5%. The balance 51% isheld by private entities. GSTN has been set up to providethe IT infrastructure for the central and state governments,the tax payers and all other stakeholderswho will be part of the GST. GSTNwill run the portal that willfacilitate this one-nation-one-tax system, including filing,maintaining, tracking and all othertransaction-related activity. ThroughGSTN the central and the stategovernmentswill beable totrack downeach andeverytransactionin thecountry.

GOAL YEARS TO GOAL SUGGESTION

Retirement 29 Rs 20,000 pm in MF SIP

House 5 Rs 41 lakh combined from balanced fund, PPF,KVP & NSC, liquid funds, a new Rs 22,000 pm SIPin balanced fund. At least Rs 40 lakh home loan

Travel & 29 (for 15 years SIP in MF for Rs 3,000 pm vacation post retirement)

Mediclaim Immediate Provided by employee

Life insurance Immediate At least Rs 1 crore term plan

NEXT EDITIONWe will discuss about how retired people couldmake their portfolio more tax efficient.

An automatic asset allocation plan could help small investors put their money inassets like equity, debt and gold through a pre-set model without personal intervention

ILLUSTRATIONS: SACHIN VARADKAR

Is It Time To Look At DynamicAsset Allocation Models?

DEBT GOLD EQUITY

BIASES THAT AFFECTINVESTMENT DECISIONS

STEPS TO DOWNLOAD AND SCAN A QR CODE● Download QR code app on yourphone ● Run app and scan the QR code● Your smartphone will read the code& navigate to the destination

Scan the QR Codefor POINTS YOUSHOULD KEEP INMIND FOR AGOOD ASSETALLOCATIONSTRATEGY

http://www.beswatantra.com/uploads/infographics/uti-beswatantra-asset-allocation-0342489001496730922.pdf

Yours Behaviourally RETURNS FROM DYNAMIC ASSETALLOCATION FUNDS (ALSO

CATEGORIES AS HYBRID ASSETALLOCATION PLANS)

TIMEPERIOD: 1-YEARCATEGORYRETURN: 16.6%RANGE : 23.2-11.2%

TIMEPERIOD: 2-YEAR

CATEGORYRETURN:

11.9%RANGE :

16.7-8.3%

TIME PERIOD: 3-YEARCATEGORY RETURN: 10.1%RANGE : 14.4-7.8%

TIME PERIOD: 5-YEAR

CATEGORY RETURN: 14.3%

RANGE : 18-10.9%

Source: Valueresearch

online.com

90%

70%

50%

30%

10%

82%

53%

35%27%

20%

267%

-10%

-30%

-50%

24%18%

18% 17% 6% 3% 0% 0%

17% 16% 15%

6% 7%

-2%-5%

-15%

1 year

MinimumReturns

MaximumReturns

AverageReturns

3 year 5 year 10 year 15 year 20 year

-47%

15%

In p

erce

ntag

e

Probabilityof Negative

Returns

AverageReturns

Long term investment reduces theprobability of negative returns

S&P BSE Sensex values taken for every FY-Month-endMarch till March 2017 to calculate returns

THE TIMES OF INDIA, MUMBAI TUESDAY, JUNE 13, 2017 23