Asset Class and Inflation

90% of investment success is attributed to the right allocation of assets, therefore understanding the asset classes is of utmost importance. What one needs to understand is, their long-term rolling (CAGR) returns with associated risk (volatility) and how they have performed over and above inflation as well as their liquidity and ticket size.

# Risk and Return of Asset classes

  • RISK here is defined as the erosion of original capital.
  • RETURN here is defined as the return with respect to inflation.

Inflation

Everyone understands inflation erodes the value of rupee/currency, but few realise, how much inflation to factor while planning for long term goal. Long term average may be 7%  for entire economy, but for different economy strata of society, inflation may vary widely. It can be 10 to 12 %.

Cash

Cash is KING. Investors normally remain fully-invested and do not maintain liquidity, thus overlooking the fact that when the market is cheap, every single rupee offers the opportunity to exponentially create wealth.  While on the other hand it is observed that when there is a need of liquidity and simultaneously, a market crash occurs, we are compelled to sell investments at a wrong price.

Insurance

  • Life Insurance is essential, but how much of it?  We feel that life insurance must be through “term insurance” and sum assured based on replacement of income + any outstanding loan. Any excess amount allocated to this purpose can considerably reduce the CAGR returns of net worth.
  • Health Insurance nowadays is a very important aspect of overall financial planning.  One must insure to derive the adequate level of health protection from the most trusted insurer, measured by the scale of having the highest % of claim settlement, NOT by the lowest premium. Because any unplanned expenses on this front can totally jeopardize your wealth creation.
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