This is not the right way of doing things.
Your asset allocation should be across the 3 primary asset classes – equity, debt and gold.
The amount that you need to have in equity doesn’t depend on your age, but rather on your goal time horizon and your personal risk appetite and tolerance. If you have 10 years left till your financial goal comes around, you can go up to 75% into equity, with 10% and 15% in debt and gold respectively. If you have less than 3 years to go till your goal arrives, try and avoid exposure to equity altogether and go completely into fixed income products. Considering the current interest rate scenario, your debt portfolio could yield strong gains.
2. Don’t Underestimate the Inflation Effect
Inflation is going to greatly increase your cost of living as the years pass. This is a fact. In order to maintain your current standard of living, you are going to spend more money. Everyone is going to experience the effect of inflation. Some people will need to reduce their standard of living. Others who have anticipated and planned their investments to offset inflation, can either maintain their standard of living, or if they have planned very well, can increase their standard of living.
Know which group you would like to be a part of and take the proper financial planning steps immediately.
3. Use the Power of Compounding to your Advantage
If you take a look at the table below, you’ll see very clearly what the power of compounding is.
Consider a small sum of Rs. 100 invested for 5 years yielding 5% per annum. It grows to Rs. 128 at the end of 5 years, with annual compounding. Now consider that it is invested for 20 years, at 5%. It grows to Rs. 265.
Does the rate of interest matter? Certainly, even a small increase in your rate of return or interest will have a large impact on your maturity value. Consider the same Rs. 100 invested for 20 years at 20% per annum. It grows to become Rs. 3,834. That is, it grows more than 38 times, in 20 years, at 20% per annum, compounding annually.
|At the End of Year / Rate of Interest p.a.||5%||10%||15%||20%|