’65:35 – Equity:Debt Asset Allocation!’

Deputy CEO, Feroze Azeez explains the importance of an asset allocation of 65:35 in equity:debt is beneficial for long-term investments in a client’s portfolio

In the next 10 years, India is going to go through a large economic growth, which is a writing on the wall! It doesn’t matter which Government takes over, the country is poised to grow because of important economic parameters. India is the only country that is growing at 8%, when the capital interest rate is at 9%. Money is very expensive in India, because the rates are 8%-9%, whereas in Japan it is 0.5%; therefore, you can borrow money and invest in your business. But in India, capital is very expensive, we are growing at 8%. So, when the capital becomes cheap, the propensity of the country growing is enormous.

From the global perspective, India used to the 10th largest economy, but in the last four years, we stepped up to becoming the 5th largest economy. This is the first time we are beating the British economy and it is a matter of pride. For the first time, we have beaten the people who ruled us for centuries, at least in terms of the economic size is now greater than Britain. So, our $2 trillion economy should become $6 trillion in the next 10 years. If does reach this level, then there is too much money to be made and I think Equity markets has a larger propensity to capture this growth.

So, when investing in the equity markets, the allocation should be between 60%-65% in equity. Real Estate has gone way ahead than it should and is facing a time correction for the last five years and will continue to undergo correction for the next five years. As we all know, real estate and equity markets are the only two growth assets that can beat inflation. Gold and deposits, by its design, cannot beat inflation. Gold is not an asset, it is a currency. An asset is something from which you derive a value – for example, if you buy a share of a company, there are lakhs of people going to work there. If you buy a gold bar and keep it in a locker, then even after 100 years, when you open the locker you will only find one bar. At the same time, if you take a stock of Infosys and put it in a locker, which is called demat account, and then remove it after 100 years, then one Infosys share would have turned into 1,000 Infosys shares. Equity reproduces but gold doesn’t. If you invest in a fixed deposit, then with the interest, I can buy another fixed deposit in the next 8 years. So, the time lapse in a fixed deposit is more and you miss out on the opportunity to earn. So, the debt allocation should be 30%-35%. Therefore, the ideal allocation should be 65% asset and 35% debt.

 

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