Not putting all your eggs in one basket is a basic but important rule of investment. Which is why asset allocation is very important! Stocks, real estate, fixed deposits, gold, bonds. These are just some of the many options one has when it comes to investing one's capital in various asset classes. Diversification does tend to reduce the risk of exposure within one's investment portfolio. The same would hold true for sub-categories as well. For instance, within real estate there is land, residential or commercial properties. Within stocks, there are largecaps, midcaps and smallcaps.
Business magazine Outlook Business' latest edition gives insights into the investment preferences of some of India's affluent families. Given their vast experiences and intellect, we thought it would be a good idea to share some insights from India's rich class.
It turns out that the preferred asset class is real estate. The reasons for the same are various. While some continue with their long term family trends, others have stayed away from equities given the volatility surrounding the same. What is surprising is that this comes at a time when the real estate sector is seemingly in a bubble phase! Having said that, the investments preferred by some of the people interviewed - who have high exposure to real estate - seem to be mainly in land, rather than residential or commercial properties.
Nevertheless, given that real estate is not everyone's cup of tea, given the large amounts involved - a thing that should not really be a problem for India's affluent families - we are of the opinion that certain exposure to the sector can be done, but only if it is affordable i.e. without taking on too much debt for the same. Also, rental yields from the same should be comfortable.
Another important takeaway is what can be derived from Harsh Mariwala's - the Chairman and Managing Director of Marico - investment philosophy. That of sticking to one's circle of competence; in other words, investing in businesses that one knows or understands. According to Mr Mariwala, he has been investing most of his capital in equity i.e. his own company simply because he understands it best. As for other classes such as precious metals, he candidly states that he stays away from such investments because he does not understand them.
What has also been covered by the magazine is the expected rate of return that such people consider as good. The same ranges between 15-20% on an average. The reason why the range floats at such high levels is the high inflation rate in India. In other words, the expected gains should easily maintain the real value of money. This is a valuable insight we believe that investors need to be reminded of time and again. We also believe good quality equities do have the power to give such returns. But provided investors do not overpay for stocks and have long term investment horizons.