March 13 , 2013
Although everybody invests to ultimately earn returns not all type of investment is suited to earn assured, regular returns in the present. But for needs coming up in the near future, say in 6 months, a year or two we allocate them in securities that will return the amount along with bonuses, if any. These financial securities can be called income assets.
Income assets- the mark
Say you are putting away money for joining a B-school in 8 months. What would be the big concern for this investment? That the money is safe and earns modest returns and not so much about earning multiples of what was invested. Your first choice might naturally be a fixed deposit or a recurring deposit. Here the deposit is locked for a particular period and interest rate is fixed for that period. This is typical of all income assets.
Thus income assets commonly have these features- fixed return rate, fixed maturity and relative safety of invested capital. So based on these it is easy to relate to income assets- FDs, bonds, PF, endowment policies, company deposits, PPF and other postal savings schemes, etc.
When to choose income assets
In fact in our country for a majority of people all their investment revolves around income assets alone. This tendency comes first from lack of awareness about the complementary half of income assets; growth assets. Second it comes from market-shyness which can again be linked to lack of proper understanding of how growth assets fundamentally work.
Income assets should be chosen to provide for all your goals expected to realize in up to 3 years. This is because the period is short to expose them to the markets where they can grow. However if you assume that income assets is all you need for all your investment goals, you're wrong.
Inflation and income assets
Since they are supposed to yield returns at a fixed rate and in a fixed period, income assets are totally immunized from the markets where growth actually happens. The result is after a couple of years when inflation has scaled up the returns from income assets would most likely be lagging behind it. In plain words you'd find that the yield from your income assets investments would be barely enough to meet your goal since inflation has made the goal much more expensive than when you started investing!
Neither is there much comfort in the fact that income assets at least guarantee return of capital. Although they might be successful at doing this most of the times, remember that if the whole economy went into doldrums for a long period such that none of the asset classes are performing well, even income assets would not be able to yield expected returns.
Build the balance
So the point is to plan your investments such that every month right amounts are allocated to cater to needs in the short term, medium term and long term through the right mix of assets.