Effective Asset Allocation: For your Financial Wellness!

Our health requires proper mix of  various food items to get us balanced doses of  protein, vitamin, iron and other minerals in the body to remain physically fit  and helping us fight health related risks.  Same holds good for our  financial wellness too, we need to diversify our money into various  instruments by taking into perspective our  risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our  financial health.

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the  key to investment success.

Here I will comprehend Asset Allocation for all you investors.

Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 Important variables affecting  your Asset Allocation:
 
1. Prioritizing  goals:

Prioritization makes it  imperative that you have clearly earmarked goals.  Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked  for significant purpose.

2. Risk Tolerance:

Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.

3. Duration of goals:

Time Horizon is another crucial factor, which one should look at. Knowing that  time horizon is extremely important when it comes to choosing the type of investments you want to make and  asset allocation you want to do. As you need to take proper medicine for a particular  duration to  recover fast, similarly you need to fix  the time horizon  for a particular goal, so that you are able to build the  desired corpus  for that  goal in the stipulated time frame.  When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.

I am sure that after keeping these aspects in mind you can have balanced  asset allocation.  But that's no all, we still have one important thing to take into account, namely, Inflation. While doing all this exercise to grow our fund with best asset allocation by taking into account above mentioned all three variables, we should also consider inflation for the same. So that optimum growth of your corpus may is not in doldrums. 
          
Returns also depend on your Asset Allocation:

For  tenure of Investment - 10 - years and above:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	70%	15.00%	10.50%
Gold Fund	0%	8.00%	0.00%
Total	100%		12.90%

Keeping other things same if allocation changes:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	50%	15.00%	7.50%
Gold Fund	20%	8.00%	1.60%
Total	100%		11.50%

Looking at above example we can understand the importance of smart asset allocation to maximize the returns. But there is a twist in the story.

The  allocation depends on the category of your portfolio, classified as:

Aggressive portfolio: This portfolio suggests that maximum portion is invested into equity say  70%,  20% into debt instrument and 10% into gold. Mostly this portfolio is recommended in case of longer time horizon.

Moderate portfolio: This portfolio implies that equity portion is 60%, debt portion is  25% and 15 % is  gold. This portfolio would seek to provide regular income with moderate protection against inflation.

Conservative portfolio: This portfolio entails that equity portion is 30%, debt Instruments 60% and 10 % is  gold. This portfolio appeals to people who are risk averse.

The question remains, how to select the category?  So to answer that, as one joins the gym for physical fitness, same way  it is advisable to opt proper guidance from Certified Financial Planner who is an expert and knowledgeable enough to help you to maintain  sound financial health.

Our health requires proper mix of  various food items to get us balanced doses of  protein, vitamin, iron and other minerals in the body to remain physically fit  and helping us fight health related risks.  Same holds good for our  financial wellness too, we need to diversify our money into various  instruments by taking into perspective our  risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our  financial health.

Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the  key to investment success.

Here I will comprehend Asset Allocation for all you investors.

Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.

 Important variables affecting  your Asset Allocation:
 
1. Prioritizing  goals:

Prioritization makes it  imperative that you have clearly earmarked goals.  Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked  for significant purpose.

2. Risk Tolerance:

Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.

3. Duration of goals:

Time Horizon is another crucial factor, which one should look at. Knowing that  time horizon is extremely important when it comes to choosing the type of investments you want to make and  asset allocation you want to do. As you need to take proper medicine for a particular  duration to  recover fast, similarly you need to fix  the time horizon  for a particular goal, so that you are able to build the  desired corpus  for that  goal in the stipulated time frame.  When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.

I am sure that after keeping these aspects in mind you can have balanced  asset allocation.  But that's no all, we still have one important thing to take into account, namely, Inflation. While doing all this exercise to grow our fund with best asset allocation by taking into account above mentioned all three variables, we should also consider inflation for the same. So that optimum growth of your corpus may is not in doldrums. 
          
Returns also depend on your Asset Allocation:

For  tenure of Investment - 10 - years and above:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	70%	15.00%	10.50%
Gold Fund	0%	8.00%	0.00%
Total	100%		12.90%

Keeping other things same if allocation changes:

Assets	Allocation	Underlying Returns	Weighted Average Return
Debt & Equivalents	30%	8.00%	2.40%
Equity & Equivalents	50%	15.00%	7.50%
Gold Fund	20%	8.00%	1.60%
Total	100%		11.50%

Looking at above example we can understand the importance of smart asset allocation to maximize the returns. But there is a twist in the story.

The  allocation depends on the category of your portfolio, classified as:

Aggressive portfolio: This portfolio suggests that maximum portion is invested into equity say  70%,  20% into debt instrument and 10% into gold. Mostly this portfolio is recommended in case of longer time horizon.

Moderate portfolio: This portfolio implies that equity portion is 60%, debt portion is  25% and 15 % is  gold. This portfolio would seek to provide regular income with moderate protection against inflation.

Conservative portfolio: This portfolio entails that equity portion is 30%, debt Instruments 60% and 10 % is  gold. This portfolio appeals to people who are risk averse.

The question remains, how to select the category?  So to answer that, as one joins the gym for physical fitness, same way  it is advisable to opt proper guidance from Certified Financial Planner who is an expert and knowledgeable enough to help you to maintain  sound financial health.

Budget 2012-13: Everything you need to know about personal taxes

Individuals have a small amount of benefit on the tax front but the overall situation will end up being negative as higher expenses in the form of additional service and excise eats up a larger part of their household budget. At the same time there are also a lot of gains on the procedural front that should not be forgotten.

Starting with the tax gain there is a small benefit that is available in terms of the rise in the basic exemption limit that has been increased to Rs 2 lakh for individuals. This means a savings of Rs 2,000 in tax for male individuals and a savings of Rs 1,000 for female individuals. There is no extra benefit for female taxpayers as the basic exemption limit for everyone stands at Rs 2 lakh so this difference has now been eliminated.

The real benefit on the tax front is for anyone who has a higher amount of income as the 20 per cent tax slab has been increased from Rs 8 lakh to Rs 10 lakh.  This will give a straight and flat tax relief to the extent of Rs 20,000 for anyone who has income in excess of Rs 10 lakh. Taken together with the earlier benefit the total figure for a male individual will go upto Rs 22,000 and for a female individual to Rs 21,000.

There is a benefit that will be available for new investors into a scheme called Rajiv Gandhi Equity Saving Scheme. This will provide for a deduction of 50 per cent upto Rs 50,000 of investment made but there will be a 3 year lock in. Further details would come in due course and these will list out whether the conditions required to meet the qualification are easy enough to let many new investors take the benefit.  What is also important is the manner in which the funds will be managed as investors want tax benefits with returns on the investment.

There is a big relief on the administrative front as having to collect small details about interest on savings banks interest and then paying tax on this has been tackled. There is a deduction of Rs 10,000 for income earned as savings bank interest so most people will gain on this front and it will make the filing of the returns easier as there will not be any extra tax to be paid. The salaried will benefit the most as they need not pay any additional amount of tax when there is a full deduction on all the other income in the form of tax deducted at source.

Investors will be able to reduce their expenses when they are investing due to the reduction in the securities transaction tax on delivery based transactions. While the figure has been reduced marginally the impact of this will be extremely small for the investors who undertake equity investing so it is more of a sentiment boosting measure.

Contributing capital to a Hindu Undivided Family has also become easier and this will make it an option that a lot more people can explore. Contribution made by a member in the form of property or sum to a HUF will be excluded from taxation while earlier this could be classified as a gift and then taxed since it was not from an exempted source.

A deduction of the expense made on preventive checkups has been proposed upto Rs 5,000 in the year. While this will encourage individuals to go in for preventive checkups and get a tax benefit for the same there is no extra benefit as the figure is within the overall limit present for payment of health insurance premium. So this is just another route to get the health expense deduction and is nothing additional.

Senior citizens might not have gained in terms of a higher tax benefit this year but they will have a lower administrative compliance requirement due to the fact that there is a proposal which says that they will not need to pay advance tax when they do not have business income in their portfolio. This is a good thing and they will be spared from the unnecessary interest cost and other compliance problems of remembering and making advance tax payments. Further the senior citizens definition has been streamlined across many areas to make it consistent at 60 years of age so this will not ensure that some benefit gets held up due to the wordings of an individual section.

The bad news is that there has to be a Tax Deduction at Source on the sale of the property when the value of this exceeds Rs 50 lakh in specified urban agglomeration and Rs 20 lakh in other areas. Since this has been introduced it will lead to a lot of situations where normal individuals will also have to pay tax on transactions that they undertake.  The transferee has to deduct and pay the tax so the person who is buying the property is the one who has to undertake the process. This is expected to be completed smoothly as there will be a one page challan for payment and the person who is the transferee will not even have to take a tax deduction number for this purpose as this would be a one time transaction.

Ensuring that your life insurance policies qualify for a tax deduction just got easier as earlier the premium paid should not exceed 20 per cent of the sum assured. Now this figure has been reduced to 10 per cent so it means that a larger number of policies will qualify for tax benefits.  One final thing while making a donation to get tax benefit ensures that the cash component is limited to just Rs 10,000 as the tax benefit for the cash part has been restriction to this figure.

Budget 2012: Pranab Mukherjee's 1st exclusive interview after speech

Shortly after presenting his Budget 2012-13, finance minister Pranab Mukherjee spoke to CNBC-TV18's Siddharth Zarabi about the constraints under which this exercise was taken.

In a very candid interview, Mukherjee spoke about the latest political development that happened too close to the big event, uncertain global scenario and impediments in the domestic economy.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.

Q: The overall climate that we have seen in the past few days - the difficult circumstances that you have faced on the economy side both domestically and internationally as well as the political climate has soured over the past few weeks and days - must have made your task very difficult.

A: The latest political development has happened suddenly. By that time, the exercise was over. But the other issue, which you have raised, is important. The overall global situation and domestic situation are not very conducive.

While formulating my Budget proposals, I had to take into account three major areas. One, how to bring back the economy on higher growth trajectory was the primary consideration. Second, how to moderate the near double digit headline inflation, which doggedly pursued Indian economy for almost two years. 

Third, the fiscal consolidation, which I believe is absolutely imperative to ensure higher and inclusive growth. We cannot allow fiscal profligacy. Therefore, these are the three major constraints which we had to keep in mind, while formulating the Budget proposals.

It was a difficult task. If you look into my entire exercise, you will find that I have given clear indications how I am going to come back on the path of our growth trajectory, how to make the fiscal consolidation and at the same time how to address the problems, particularly from the supply side constraints by removing those constraints either by higher allocations or by focusing at it. So, that is the overall environment in which we had to formulate.

I had Euro zone crises at the back of my mind. There is no solution feasible in near future. Recovery of USA has begun, but still it is halting and fragile. Same is the story with Japan. Therefore, one of the important aspects, which I have also emphasised, was the domestic demand driven growth strategy, how to enhance the purchasing power of the rural population which will generate adequate demand, which will act as a driver for the growth.

Q: Let us come to the point of fiscal consolidation. Clearly, last year's fiscal projection that you had made with based on certain assumptions, of which oil was certainly not in your control at all. That took away some sheen of the fiscal deficit numbers. You have now projected a 5.1% fiscal deficit for the next fiscal year, assuming a certain level of oil prices, around USD 115 per barrel. Is there a downside risk from crude oil supplies as far as the basic fiscal projection and math of the central government is concerned?

A: So far the budgetary exercise is concerned, I have not addressed one of the major areas, which is causing a substantial erosion of resources by enhancing the subsidy. Therefore, the resources, which could have been deployed in other areas, are to be diverted there. It happened last year because my assumption was it would be USD 90 per barrel.

Now, I am pretty sure that it is not going to be less than USD 115 per barrel. On the one hand, I am working on the additional resource mobilisation. Second aspect on which I have emphasised from the expenditure control, I have bound myself by bringing it down to the level of 2% of GDP, which is the current level of subsidies and to bring it down to 1.75% of the GDP in the next three years and also to have a three-year fiscal target.

The fiscal statement, which I am committed to present to Parliament, there will be three years rolling target. That will provide us an opportunity to make a correction in the midcourse, as and when needed. But at the same time, these issues are to be addressed, which I could not address. These issues cannot be left uncovered.

Q: On the subsidy control side, you have clearly made a very marked departure by saying that certain kind of subsidies will remain capped in some ways. That is the sense we got from your speech. Beyond that, you have also spoken about additional resource mobilisation. Again, on the oil subsidy front, do you anticipate a major problem because in the current year you saw oil subsidy going up by Rs 45,000 crore? What is the scenario likely to be?

A: We shall have to address the issues. Collectively, we shall have to address these issues. Budgetary exercise is not the only way we can address it. But we shall have to address these issues. When and how? Ofcourse that is a matter to be decided.

I am also going to address to the political establishment of the country because collectively we shall have to think of it. It is not the question of this party or that party because it is going to affect all. Therefore, at some point of time, we shall have to recognise this fact. Continuous efforts are needed. What type of action, what type of road map I am thinking, I am just not spelling it out, but shortly we shall have to do that.