March 13 , 2013
Broadly all your savings and investments would go to either of these two asset types- growth assets or income assets. It is very easy to distinguish between these two. Growth assets are those investments where money is allowed to grow over the long term by moving with the flow of markets.
Growth assets- the marks
When any investment is linked to the markets the returns cannot be pre-determined. But one thing is certain, as time flows your investments would yield returns that are well above inflation and in sync with the growth of market and economy. Discounting interim fluctuations due to various local political, social, environmental or global reasons, you would always expect markets and businesses to go up in value since if they did not for long periods then this would mean collapse of the economy.
Thus growth assets essentially have these characteristics: i. no fixed rate of return, ii. no guarantee of invested capital, iii. beat inflation in long term.
By now you'd be able to tell which investments are growth assets. Shares, equity mutual funds, real estate and gold are the popular growth assets.
Balancing growth assets and income assets
Now come to choosing between growth assets and income assets. It's easier to understand when to avoid growth assets. If your investment is not for long duration then income assets is the place to go, where return rate is fixed in advance. In investing, anything equal to or more than 5 years is long term. A long term allows your investment to absorb short term fluctuations and give a leveled-out return.
At any point in time you can plan monthly investments such that some of it goes to income assets for use in the short term or medium term and the rest is allocated between growth assets. The right proportion of growth assets and income assets depends on your personal investment goals and how soon or late they are expected to realize.
Generally with age your exposure to growth assets would decrease. Those approaching retirement or who are retired would have little allocation in growth assets because the priority for them would be to lock in returns at a constant rate.
However for those just starting out or in the middle-ages, growth assets are simply unavoidable, if their investments are to beat inflation in 10, 15 or more years. As Indians many of us are averse to shares and mutual funds. Share market is considered synonymous with greed. But all fears about fluctuations apply mostly to trading, not to investing which is a long term affair.
I'd rather avoid growth assets- they're risky
We don't have to tell you that inflation is for real. If we assume an inflation rate of 9% per annum, what costs Rs 100 today would cost Rs 236 in 10 years, Rs 364 in 15 years and Rs 560 in 20 years! Now link that to future cost of a house, education, maintenance and so on.
You might still argue why risk losing money at all in growth assets; why not just stick with an assured rate? The point here again is, rates fixed now will most likely lag behind inflation going ahead. Only rates free to move with markets can help you. If at all the markets fail in the long run, nothing would help, not even fixed return securities would pay what is promised.
Go get them
You can start with a diversified equity mutual fund SIP. You can also have investment in gold mutual fund or gold ETF but take care not to go overboard. Real estate requires bulk money, not all can afford. As time progresses you can rebalance your investment portfolio to ensure the balance is not skewed.