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Real Income Is What You Earn From The Market

There is no denying that equity market is probably the best asset class to invest for higher returns. However, putting all your eggs in one basket is not the most prudent approach

Photo Credit : Reuters

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An old friend of mine, who was a stock market veteran with an experience of more than 30 years, always told me " Market se jo nikala wohi kamayi" ( What you were able to take out from the market is what you have actually earned). To put it another way, the net amount realized from your stock market investment and put in some other yielding asset is your real wealth. Investment such as -- tax-free bonds, debt funds, rent-yielding real estate -- all provide sustainable cash flows.

Recently, we have seen a flush of inflows into small-cap focussed funds at a time when market valuations are on the higher end. Though the microenvironment seems to be steading post disruptions caused by demonetisation and GST, the companies are still not completely out of woods.

Stocks as an asset class give the highest returns. However, the risk of investing in this asset is pretty high as well, given the volatility associated with it. A particular stock could give you 200% return but could also completely wipe-out your invested corpus. In the same way, an investment in bonds could reduce the risks associated with volatility but the returns could be paltry in comparison to stocks.

The key here is to diversify the risk of investment while maximizing the returns. Asset allocation is the process of distributing your investments across various asset classes, such as equity, debt, gold, cash, etc., according to your risk appetite and the time horizon of your financial goals.

Proxy-diversified MF  
Recently, I met an ex-billionaire (in Rs terms), who lost everything in the last commodity bust. Looking back, his only regret was his inability to save enough money for his family. Since the return on his core business was very high, he did not think of diversifying his investments. Now, he strictly follows one mantra while investing- to have exposure to at least 3-asset classes.

Earnings yield vs bond yield 
The objective of having a well-thought-out asset allocation across assets is to build a portfolio that closely matches your future return expectation while keeping in mind the risk or volatility that you can bear. Your strategic long-term asset allocation ideally should be linked to your goals.
Also, one must remember, that historic return is not a guarantee to future success. So, while diversifying investments, the margin of safety should be given as much importance as returns.
   
There is no denying that equity market is probably the best asset class to invest for higher returns. However, putting all your eggs in one basket is not the most prudent approach.

Like Robert Kiyosaki famously said, "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Abhimanyu Sofat

The author is Head of Research, IIFL Securities

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