Asset Allocation, Saving and Investing Options
On this page 12 headings
Start here Companies make a balance sheet every year. So should you. If you don’t measure what you own and owe, you can’t improve it.
Note: This lecture was recorded in November 2022. Interest rates and some tax rules have changed since then. See the “Changed since the lecture” box at the end.
Your personal balance sheet
Make one every year (31 December or 31 March). Check it every 3 or 6 months if you can.
| Personal assets (what you own) | Personal liabilities (what you owe) |
|---|---|
| Cash, bank savings, FDs, PF, recurring deposits | Loans (home, car, education) |
| Investments: mutual funds, shares, NPS | Credit card dues |
| Insurance cash or surrender value | Personal debts |
| Real estate (flats, plots, land) | Insurance commitments |
| Personal property (your own home) | Real estate mortgages |
| Loans you gave to others (loans receivable) | Unpaid taxes |
| Vehicles | Vehicle loans |
Net worth = Total assets − Total liabilities
Each year, check:
- Current year savings = cash inflows − cash outflows.
- Growth in net worth, in rupees and in %.
- Did it beat inflation (about 7%)? If not, see a certified professional (e.g. SEBI-registered or CFP-certified).
- Your real rate of return (after inflation, taxes and expenses) must be positive.
Credit cards are powerful if you pay the full bill before the due date. Paying only the “minimum due” leads to trouble.
Income statement: four simple rules
- Income > Expenses: always spend less than you earn. Save for goals first.
- Assets > Liabilities: keep a positive net worth.
- Don’t lock everything in physical assets (like real estate).
- Focus on growth in net worth. After marriage, do this together with your spouse.
Why bother? Measure → Monitor → Control → Direct. That is how you make progress.
Lecture example — one year’s balance sheet House: 100 → 110 (+10%). Car: 10 → 9 (−10%, a car loses value). Gold went up. Some shares and funds went down that year. Overall net worth: +5.3%. Bad years happen, even to Warren Buffett. Long-term investments usually bounce back.
Investment options: quick pointers
| Option | Good points | Watch out for |
|---|---|---|
| Debt and hybrid mutual funds | A professional invests for you. Hybrid = equity + debt. Funds with 65%+ in equity get equity taxation (lower). | When interest rates rise, bond values fall. Past problems: Franklin Templeton, IL&FS. |
| RBI bonds | Very safe: backed by the government. Rate = NSC rate + 0.35% (about 7.1% then); 7-year term. | Taxable. At 30% tax, you keep about 5%, below 7% inflation. Good for retired people, in part. |
| Bank fixed deposits | Simple. Good for the emergency fund. Use laddering: FDs maturing in 1, 2 and 3 years. | SBI and big banks paid about 6–6.5%; small finance banks about 8%, but riskier. Banks have failed (Yes Bank, Lakshmi Vilas Bank, Global Trust Bank). Fully taxed. |
| Corporate deposits / bonds | Higher interest (7.5–8%). Some good ones exist (e.g. HDFC). | Capital can be lost (Reliance Capital). Many papers to manage. |
| Gold | Indian families love it. SGBs (Sovereign Gold Bonds) also paid 2.5% interest a year. | Max 10% of your assets. Gold at home has storage and safety costs. Gold has little “end use”; the lecturer also suggests some silver. |
| Direct equity (shares) | The biggest fortunes were made here. | Needs time and knowledge. |
| Real estate | Can jump when a new airport, AIIMS or highway comes. | Not liquid (hard to sell fast). Can give 0% for years. |
Keep some cash ready
A cash portion lets you grab opportunities. Example: after the 2004 tsunami, coastal property prices in Chennai fell. People with cash could buy cheaply.
The equity universe
Companies are grouped by size:
| Group | Meaning | Lecture examples |
|---|---|---|
| Giant | The very biggest | Reliance Industries, TCS, SBI |
| Large cap | Big, just below giant | L&T, ICICI Bank, Axis Bank |
| Mid cap | Medium-sized, growing | (see note below) |
| Small cap | Emerging companies | (see note below) |
| Micro cap | The smallest |
Note: For mid caps the lecturer named Nestlé and Hindustan Unilever, and for small caps Paytm and Zomato. In reality, HUL and Nestlé India are among India’s largest companies, and company sizes change over time. Learn the categories, not these examples.
How to invest without picking shares yourself:
| Way | Minimum (as in the lecture) |
|---|---|
| Mutual fund | Even ₹100 |
| ELSS (tax-saving mutual fund) | Small amounts; Section 80C benefit |
| PMS (Portfolio Management Service) | ₹50 lakh |
| AIF (Alternative Investment Fund) | ₹1 crore |
Wrap-up: big-picture planning
Investment planning: four risks
| Risk | Meaning | Example |
|---|---|---|
| Liquidity risk | Can’t get cash when you need it | Money stuck in a flat when you need fees for study abroad |
| Credit (safety) risk | The borrower doesn’t pay back | Yes Bank bonds, Reliance Capital |
| Volatility risk | Values go up and down | Markets in a recession |
| Concentration | Everything in one category | Spread across physical and financial assets |
Estate and legacy planning
- Make a will (or a trust). Without one, your assets are intestate: the law decides who gets them, by your personal law (Hindu, Muslim, Christian, Parsi and so on).
- A settlement can make sure your spouse is cared for first.
- If you take foreign citizenship, you can’t own agricultural land in India.
- Some countries (UK, US) have inheritance tax or estate duty above a limit. India abolished wealth tax, but rules may change.
Regular cash flows: the meaning of financial freedom
Regular outflows: rent, credit card, insurance, school fees. Regular inflows beyond salary: FD interest, corporate deposits, rental income, dividends.
Financial freedom = when income from your assets is more than your expenses. Your money works for you, so you don’t have to work.
Health care
- Healthcare costs can rise 10–15% a year. Start cover early; don’t depend only on your employer’s policy.
- Layers: employer policy → base policy → top-up → super top-up.
- Check the exclusions (e.g. pregnancy).
- Declare existing illnesses (BP, sugar). Pre-existing diseases have a waiting period (4 years in the lecture). Honest, claim-free years can earn a no-claim bonus.
Personal taxes
- Clubbing: income from money put in a spouse’s or child’s name may be added to your income.
- HUF (Hindu Undivided Family): a separate tax unit; it can’t have salary income.
- Gifts: from close relatives, any amount is tax-free. From others, gifts above ₹50,000 a year are taxable.
- Some annuity income can be tax-free.
Changed since the lecture (late 2022) — for real life
- Debt mutual funds: the indexation benefit was removed from April 2023. Gains are now taxed at your slab rate.
- Sovereign Gold Bonds: the government has stopped new issues (no new series since 2024). Old bonds still trade.
- Health insurance: IRDAI cut the maximum waiting period for pre-existing diseases from 4 years to 3 years (from April 2024).
- Interest rates on FDs and RBI bonds have changed. Check current rates before investing.
In one line: Make a yearly balance sheet, grow your net worth faster than inflation, spread money across asset classes, and plan for liquidity, safety, health, taxes and a will. Exam words: personal balance sheet, net worth, current year savings, real rate of return, income statement, RBI bonds, FD laddering, corporate deposits, SGB, giant / large / mid / small / micro cap, PMS, AIF, liquidity risk, credit risk, volatility risk, will, intestate, financial freedom, top-up, clubbing, HUF.