Personal Finance: Incubating A Nest Egg

PERSONAL FINANCE
Incubating A Nest Egg

If you are in your mid-thirties, and have a decent-sized portfolio, here's your chance to: buy a home; create a nest egg; and retire in 10 years. If you aren't, read on. There is such a thing as vicarious pleasure.

By Roshni Jayakar

There is nothing like a capitalist-declaration to start a composition on smart-investing: this article is meant for people in their mid-thirties, with savings that aren't insignificant (read that as between Rs 10,00,000 and Rs 15,00,000), and with a desire to buy a house, or retire, or do both in the next 10 years. This target audience could include singles, singles with kids, couples with kids, couples without kids, couples planning kids, or couples who hate kids. The number of investors who fall under any of these definitions isn't as small as the savings-requirement suggests it will be. Salaries, in the better companies, and especially in the metros have boomed, and it is quite conceivable that a professional in his mid-thirties would have-if he or she has been conservative without pinching the pennies-what investment advisors term a 'healthy investible surplus'.

The actual sum, between Rs 10,00,000 and Rs 15,00,000, was arrived at after taking into account the minimum sum that would need to be invested so as to generate Rs 20,00,000 to Rs 30,00,000 in 10 years (the cost of a house), and also have enough surplus as a nest egg of sorts. That will, of course, not really be sufficient to live happily ever after, but this article assumes that the investors will continue to save money at the same rate (close to 40 per cent of the salary) they have done so for the next 10 years of their working lives.

It isn't a great time to decide on any kind of investments. The Sensex is nearly 45 per cent off its peak; the nse Nifty has dropped 39 per cent; the post-tax return on deposits just about manages to beat the rate of inflation; interest rates look set to get softer; and gold, with a 3.4 per cent annualised return, has certainly lost its sheen.

Popular wisdom would advocate waiting for the stockmarkets to revive; popular wisdom would be wrong. ''It would be expecting too much to wait for the stockmarket to move up,'' says Vijay Venkatram, Manager (Private Banking), HSBC. ''It would be advisable to rebuild the portfolio with new stocks that stand a chance of being market performers in the next rally.''

The trick, though, lies not so much in picking specific equity and debt-instruments, but in deciding how the investments have to be broken up across asset-classes. Explains Pallav Sinha, the chief executive of JM Morgan Stanley Retail Services, which recently launched its retail investment advisory services in India: ''Over 90 per cent of the variance in returns to an investor stem from asset allocation.''

A mere 4.6 per cent variance in returns is a function of security-selection, and an even more insignificant 1.8 per cent, market timing. For those confounded by all this talk of variance, what this means is that returns depend more on whether you invest in debt, equity, real estate, or gold, than on the individual stocks you pick, or the time when you decide to buy these stocks.

The five investment schedules listed here should help investors rebuild their portfolios with an eye on the future after taking into account rider-clauses containing terms like Caveat Emptor and all that. There are three threads that run through the five recommendations: a strong base that makes the portfolio resilient; an eye on appreciation to ensure that the investment grows with time; and liquidity, should the investors feel the sudden need for some money.

Stolid, But Solid

These stocks will never gift investors with three-digit returns; nor will they plummet when the market suddenly dies. Most defensive portfolios are built around these stocks. Typically, these stocks are of large, established companies operating in mature industries, and churning out products and services that are almost quotidian in usage. Pharma and FMCG stocks fit this description: they deliver stable returns, even during an economic downturn. The flip side? These stocks are unlikely to participate in a market-rally or bull-run.

Another constituent of a defensive portfolio could be stocks that yield huge dividends. Some public sector companies impress in this context: ONGC (stock price: Rs 140) declared a dividend of Rs 12 per share this year; SCI (Rs 30-odd), Rs 3 per share. Then, there is old-faithful, debt. ''Some amount of debt is essential for a strong portfolio,'' says Abhash Modi, Vice-President (Equity and Private Banking), HDFC Bank. This could take the form of debt-funds, gilt-funds, or a mix of both. Why, even insurance policies could serve this need. Agrees Vinay Bajpai, Head (Investment Advisory), Investmart India: ''The falling interest rate regime has made several insurance polices highly lucrative.''

The Art Of Appreciation

Once building-block # 1 (a strong base) is taken care of, the next step is to identify investments that can appreciate. ''You could try and predict which sectors will dominate the up-trend in the next bull-run,'' says Nilesh Shah, Vice-President, Kotak Securities. One way to do this is to avoid sectors that have led the market-rally in the past: auto, cement, and steel led the 1992 upsurge; public sector companies, the 1996 one; and TMT stocks, the 1998 one. Stockmarket history indicates that it is a rare sector that leads successive bull runs.

Circa 2001, most pundits feel it is the turn of the pharma, banking, and cement sectors. Since pharma is anyway a 'safe' sector, that's like killing two market operators with one stone. Within each of these sectors, says Jaideep Hansraj, the head of the private client group at Kotak Securities, ''invest in the top two or three companies''. You could do that; you could go long on index futures; you could invest in aggressive growth funds; or you could even pick Sensex-heavyweights like Infosys or Reliance.

Money In Hand

There's no telling when an investor will need ready money. ''Liquid funds,'' says Bajpai of Investmart, ''are preferable to bank deposits. No entry and exit loads, and 24-hour redemption, are some advantages''.

The five investment schedules listed here meet these three criteria. If you're one of those investors comfortable with technical analysis and spreadsheets, you could probably create your own. But, it isn't enough to just pick a great portfolio; it is more important to monitor it. If you wish to do neither, or if you simply don't have the time, or the skills, retain the services of an investment advisor. Some of them may actually be able to beat the market.

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