The ideal asset mix for a young, inexperienced investor

The ideal asset mix for a young, inexperienced investor 

We crunched the numbers for you and discovered that while a portfolio with a 60:40 stock ratio hasn't lost money since 2008, one with a 100 percent equity allocation can occasionally do so.

How much should you invest in shares and loans if you're investing your first salary or are in your 20s and just getting started with investing? What should your asset allocation look like in plain English?

If you visit any financial planner, you will hear it right away. There is no one solution, even though selecting the appropriate mutual fund or stock is equally crucial. Each investor has a unique asset allocation that is based on a variety of factors. Now what?

Choosing the proper blend

Five distinct mixes of stock and debt instruments were used in a simulated exercise that we tried.

The simplest type of asset allocation is a 50:50 split, whereby one invests half of one's portfolio in equities and the other half in fixed income securities. This guarantees that the portfolio receives a boost from equities returns while also benefiting from the security provided by debt instruments.

While a person's risk tolerance will determine their equity exposure, experts advise young investors to have a higher stock allocation because they have longer investment horizons.

During the past few decades, the 60:40 investment allocation has been the cornerstone of portfolio construction. A 60:40 portfolio is an option for a conservative investor in India who wishes to outperform inflation without taking on a lot of risk.

According to data calculations made by Moneycontrol, as of February 14, 2023, a 60:40 portfolio generated returns of 9.25 percent on a 5-year rolling basis. The 40 percent debt element is made up of the average returns of the Crisil Composite Bond Fund Index, Crisil Liquid Fund Index, Crisil Short Term Bond Fund Index, Crisil 10-year Gilt Index, and Crisil 1 Year T-Bill Index. The 60 percent portion is invested in Nifty 50.

A 100 percent stock allocation generated returns of 11.29 percent during the same time period.

Data indicated that

Also, whereas a portfolio with a 60:40 stock allocation hasn't had a loss since 2008, a portfolio with a 100 percent equity exposure may do so occasionally.

According to experts, you can comfortably allocate more than 50% to stocks when you're young because you're more willing to take on risk.

"Yet, there are several variables at work. The amount of your household's expenses, your contribution, and your marital status all contribute greatly. You don't have to invest 70–80% of your income in stock just because you're young, according to Rushabh Desai, founder of Rupee With Rushabh Investment Services.

According to Suresh Sadagopan, Managing Director and Principal Officer at Ladder7 Wealth Planners, a decent portfolio can be 60–70% biassed towards equity for investors with a reasonable appetite for risk.

Investors must resist the urge to invest their entire account entirely in stocks, though.

"The experience of (and the reaction to) market correction is particularly significant for first-time investors. You should still keep some debt in your investment until you get your feet wet in the market, according to Deepak Chhabria, CEO of Axiom Financial Services.

Which stocks?

Which shares to invest in is the next decision that investors must make after determining their equity allocation.

There are 11 categories of equity, according to SEBI. An investor has an abundance of options when theme and sectoral stocks are added.

Nonetheless, a rookie investor should keep things basic and avoid sectoral or thematic schemes because they need knowledge to understand.

"If a person is entering the mutual fund market, they can begin with a flexicap fund and possibly a largecap fund. They can add midcaps once they have some expertise in these areas, according to Chhabria.

Keep in mind that choosing funds should involve choosing fund managers with various approaches to investing, as this will help to further diversify your portfolio and boost risk-adjusted returns.

Desai advises investors to avoid becoming mired in the value vs. growth controversy at the beginning of their trip.

Value as a segment can be cyclical and can take longer to produce returns than a growth or a balanced strategy. It's possible that novice DIY investors lack that amount of patience or don't comprehend cyclical movements. Continue to expand or

Value investing strives to make money by finding discounted stocks, whereas growth investment seeks to produce profits by concentrating on businesses or industries that are currently growing.

The debt component

According to experts, even while a fixed income allocation might reduce losses in a down market, this share should be reserved for capital preservation rather than return generation. Financial gurus advise debt-focused mutual funds for this.

"Low-duration, liquid, and ultra-short term funds are available. There are target maturity and gilt funds as well as PSU bonds with a AAA rating if you want to be extremely safe. According to Sadagopan, debt funds offer the best post-tax returns of any investment option.

Read more: Which target maturity fund can help you weather the last rate hike(s) from the RBI and beyond?

Keep that in mind

Does this mean you should invest 50–60% of your savings in stocks and the rest in debt and leave the rest alone?

It is never a wise move. A 50–60% equity allocation is a fine place to start, but as your salary increases, you should allocate a bit more, perhaps 70–80%. Your financial portfolio increases with age, along with your family and obligations.

Start thinking about retirement by the time you are in your 30s. Starting early, according to financial advisers, is essential. "Planning for retirement at 45 is highly challenging because there are very few working years left and significant savings are required. So, starting to save money for retirement is one of the things a young person should do, according to Sadagopan.

While some financial circumstances can be addressed on your own, according to experts, other ones are better handled in cooperation with an advisor.