Can a healthy portfolio be created without equity?

ABOUT THE EXPERT

Vivek Sharma

Vivek Sharma
Financial Planner and Trainer

Is equity must in every portfolio? Is it essential that you should invest in equity directly or through mutual in order to generate wealth? The answer to the question is debatable but the fact remains that majority of the people in India create their wealth without using equity as an investment option. This information is not based on gut feeling or general analysis of trends in savings and investments.

As per RBI report, much of the financial savings of the household sector are in the form of bank deposits (around 30 per cent in the 2000s), life insurance funds (22 per cent in the 2000s as against 9.6 per cent in the 1980s), and pension and provident funds (16.5 per cent in the 2000s as against 23.6 per cent in the 1980s). Another startling fact that comes out from RBI report which says shares and debentures accounted for 8.3 per cent of total financial savings in the1980s; their share increased to nearly 13 percent in the 1990s before declining to 4.8 per cent in the 2000s.

So how is wealth getting created in India? There is no doubt that people are getting richer. We have a sizeable and growing middle class population in the country which is earning more and becoming wealthier. What are sources of wealth creation for these people? Let us look at some of these sources which helped people in India create wealth without equity being included in portfolio.
Real Estate: The largest wealth creator in India has been land and houses built on these lands. People have created wealth in two ways using land and houses. For a simple reason that real estate makes sense in a country like India is ever increasing population and limited land supply. While real estate may involve huge investments in large cities, it is still possible to invest in land and houses in remote location a relatively cheaper cost.

One of the constraints in case of real estate is that it very illiquid and may be difficult to sell immediately like equity or other traded assets. But investments in real estate should be done with long term perspective. Also while making investment in real estate, never stretch your limits which means that maximum 30% percent of income should be allocated as EMI. If you are a first time home buyer recently announced budget has a sop in form of extra tax benefit as well.

Gold: Gold as an asset has given unprecedented returns during last ten years and looking at the shaping of events in the days to come, it won't be a surprise to find gold offering similar kind of returns. Gold can be invested in form of ETF or physical gold, but the return remains better than other asset class like bank deposits, mutual funds and shares in many cases. There are some arguments given against investment in gold. One of the factors considered for this argument is illiquidity of gold. If you invest in gold ETF, this negative aspect is taken care of.

High Coupon Corporate Bonds: For an investor, who is willing to take risk of investing in equity shares, idea of investment in high coupon corporate bonds cannot be a bad proposition at all. In 2012, many companies floated bonds which offered rate of interest between 11.5% to 13.5% interest. No doubt that these bonds had risk elements, but by putting a part of corpus in these funds an investor can mitigate risk.

Government Securities: Government and public sector undertakings continue to come out with attractive fixed income instruments from time to time. For instance there is a 8.97% coupon GOI Bonds which is maturing in 2030 which if bought at the time of issuance could have made an attractive investment idea. Two years back SBI offered 15 years bond at 9.95% bond. Parking funds in such investment option is very attractive from return perspective. In spite of being taxable, these bonds offer decent post tax returns.

Public Provident Fund and Voluntary Provident Fund: For a person looking for decent and almost risk free return, there is no investment option like a PPF or VPF. PPF currently gives a return of 8.8% return which is tax free. For a person in the highest tax slab, this rate is quite high considering the tax benefit. To build wealth, it is important that we keep on investing in PPF upto the maximum permissible limit as it will help us create wealth as power of compounding work in our favor.

There are many other investment options which can help us create wealth like tax free bonds or debentures of companies (these instruments are relatively risky). Now even investments can be done in commodities through National Spot Exchange. Also those having risk appetitive can invest in currency .It is not always essential that you put your money in equity or mutual funds. Portfolio is a matter of choice and risk appetite driven by goals set by an individual.