Getting started as an investor: Consider Asset Allocation

This is the next article in my series for investing for beginners (first, and second post), and focuses on asset allocation.

What is Asset Allocation?

Most people start out investing without having a strategy, and invest their money in different assets without necessarily thinking about the distinction between them, and how the risk – return profile vary from one to the other.

Asset Allocation means taking your money, and investing it across different classes of assets like stocks, fixed deposits, commodities like gold, silver, crude etc., postal deposits, provident fund, and of course cash in a certain percentage that helps spread risk.

The way I look at asset allocation is to first have some liquid cash for emergencies stashed away in a savings account, and then start thinking about spreading your investing corpus in other asset classes.

Avenues for Asset Allocation

This is how I think of the major asset classes where you can put your money:

1. Savings account: Savings account give out 3.5% interest per annum, and with inflation rates close to 10%, the real return on this is negative. So, I’d consider this only for emergency funds, and day to day expenses. A lot of you might feel that this is not really an asset class, so just think of this as a placeholder for emergency funds. You can replace this with cash if you like that better.

2. Government of India bonds, Postal deposits: This is an ultra – safe investment class if you are in India, because the bonds are backed by the Government of India. The returns are higher than that of savings account, but lower than that of fixed deposits from banks.

3. Bank and Company Fixed Deposits: You can make fixed deposits with banks or companies, and in general — companies pay a higher interest rate than banks. Fixed deposits with companies are considered to be riskier than banks, so they give you a slightly higher interest rate. In general, I see that the fixed deposit rates are closer to the inflation rates, so you can hope for your money to keep pace with inflation, and over the longer run, have a real return of  a few percentage points.

4. Debt Funds: There are plenty of mutual funds that invest in debt instruments, and if you don’t want to go the way of a bank or company fixed deposits because you are interested in investing periodically instead of lump – sum, then you can choose  a bond fund.

5. Equities: Equities consist of investment in mutual funds, ETFs and directly investing in stocks.  This class is the riskiest because there is no guarantee of returns, and in fact a lot of people do lose money in equities. Over the long run however indices like Nifty have given a much higher return than fixed deposits. Again, this doesn’t mean that everyone who invests in equities makes that higher return, if that were the case then there wouldn’t be any need for asset allocation at all. This simply means that if you look at the last ten years or twenty years – Sensex has risen faster than the returns offered by banks, but there has been a lot of volatility which has led to losses as well.

6. Gold: I really don’t know how to place gold in all of this. It is conventionally thought of as a safe haven, but given the recent interest in gold, there is a lot of speculative interest built up on this, and I feel that it is riskier than it once used to be, and would ask investors to treat it with caution.

7. Real estate: A lot of people consider real estate as an asset class, when they shouldn’t. Personally, I don’t think that the house you live in is really an asset. If you are still paying an EMI on it, then it is probably more of a liability than an asset. Sure, you are leveraged and if the prices are rising, then you can make some money out of it, but if prices fall, then you are stuck with it as well. This is what happened in the US recently, and Japan in the late 80’s. Real estate prices crashed, and people who were leveraged had a really tough time, as is quite well documented by now.

For me, real estate is only an asset if it is a second house, if it is commercial property or farmland, and is not a place I call home. The real estate mutual funds I have looked in India primarily invest in companies engaged in real estate and don’t directly invest in real estate, so to me, they fall under the umbrella of equity more than they fall under real estate.


These are some asset classes that come to my mind, and each of these can be further broken down, like debt can be broken down into floating rate bond funds, gilt funds or equities can be broken down into large caps, small caps, international equities, gold into gold coins, gold ETFs.

But for now, the takeaway from this post should be understanding that different asset classes give you different risk – returns, and your portfolio should be balanced.

If you have too many stocks then you risk losing a lot of money if the market crashes, as Tony recently told us in his story.

On the other hand – I spoke with a friend yesterday who has all his money in his savings account. The number that he spoke of was quite significant, and he just never got around to doing anything about his savings. And now inflation is eating it up, obviously this is a much better problem than having no money at all, but at some point he will have to face the fact that his real return is negative, and he has to invest the money somewhere.

So understand the importance of asset allocation, and think about your own risk profile, and which of these asset classes interest you.

Once you have determined what your asset allocation should be, the next step is to look at each of these categories, and determine where to invest in that. It is not necessary for one person to invest in all of these categories, so for example – you could have some liquid cash, fixed deposits, and equities, and that way your risk is spread, which is what asset allocation aims for.

The key is to understand that different asset classes have different risk – reward structure, and then build a portfolio according to that.

Reader email: Tony’s journey on the stock market roller – coaster

The first poll here at OneMint was born out of my exasperation with emails from readers inquiring about mutual fund refunds, and I never expected it to take the momentum it has. There were some great comments, and then Gaurav shared the story about his journey, and today I am glad to share Tony’s narrative, which is really really interesting because it gives a perspective from someone who made and lost significant sums in the market, has taken control over his finances, and is in the UK, keenly observing India, I think he must be a pretty unique investor.

Here is his story, do leave a comment, and tell us how you feel.

Though I live in the UK, – I’m very interested in India and OneMint is one of my favourite sites. I’m supposedly an educated, professional, but I was DUMB. I’ve been investing for 10 years, but consider myself a novice because I foolishly relied upon investment professionals until recently – this was an expensive mistake!

Probably as a result of my previous bad experience, I’ve decided the most important aspect is asset allocation. I have decided my ideal split (30% UK equities, 20% global equities, 20% commodity-related (e.g. oil or mining), 20% bonds, 5% property etc.) and I invest new money according to any shortfall in a category.

Hopefully my story will interest you and encourage other novices to gain investing confidence.

Here’s some background information:

Date UK FTSE 100 index value Comment
10 Sep 2007 6134 Retail bank (Northern Rock) receives liquidity support from Government
01 Nov 2007 6723 FTSE reaches high point!
19 Feb 2008 5966 Northern Rock nationalised
19 May 2008 6302 Just before stock market “crash”
17 Sep 2008 4912 Announcement that 2 large retail banks will merge (Halifax Bank of Scotland and Lloyds Bank) requiring Government assistance
09 Mar 2009 3460 FTSE reaches low point!
26 Aug 2010 5155 Today

Prices from Yahoo Finance

The peak to trough fall isn’t that different to what happened to the Indian stock market (and everywhere else in the world). However, I can honestly claim that it was obvious to me that this was about to happen, although I grossly underestimated the size of the fall. My financial adviser (and most market commentators) were keen to tell people to keep investing until the very end, including buying shares in the distressed Northern Rock at a “bargain” price (investors lost everything).

In July 2007, I ignored such advice and sold 25% of my investments and kept the money as cash. (This was still dumb: if I was clever, I would have sold everything and shorted the market!)

I didn’t know what was happening in the USA with Lehman, AIG etc., but I had heard news about increasing property repossessions.

In the UK, it was becoming obvious (to me) that the property boom and the massive increase in credit had totally distorted the economy. Everyone I knew was reading “Rich Dad, Poor Dad” and buying multiple properties using borrowed money. I didn’t join my friends because the sums didn’t add up – the problem was that the rental income didn’t cover the loan repayments – the assumption was that property values would keep increasing forever. I thought individuals (and banks) would fail when property values eventually fell (as they did in 1990) – I didn’t know that it would be the lack of credit that would cause the crash.

So, I was clever, but not that clever because I continued to invest 75% of my money and then lost much of it. How much I lost is hard to quantify because I think most investors lost money in 2008/2009. I lost money compared to cash obviously, but I lost money compared to say a simple index tracker. I didn’t understand (or was advised) about asset allocation – hence other than my 25% in cash, my portfolio in (badly managed, expensive) mutual funds crashed massively.

I believe I lost about 25,000 GBP (approx 1.8m INR) more than I think I should: this is a large sum to me.

In the UK, financial advisers, banks and insurance companies are regulated. This means next to nothing. Banks (almost) collapsed. Advisers vanished. Occasionally fines and compensation are awarded. Meanwhile, individual investors are worse off.

Rather than blame everyone else, I decided to take responsibility for my own (financial) destiny. So I read everything I could (books and websites) and began watching business TV shows. I started to make my own decisions for the first time and make my own mistakes!

At first I didn’t have a strategy: I followed tips and I was a little stupid at times. I found that I enjoyed the subject and I was prepared to invest my time researching individual stocks. Over the past year, I have developed my strategy as follows:

Strategy summary
• Minimise tax (take advantage of any legal tax avoidance schemes such as retirement plans)
• Minimise costs (administration and dealing costs)
• Minimise risk by diversification and asset allocation
• Seek value e.g. quality companies that the market has mis-priced (e.g. P/E ratio less than 10), financially strong (low debts), no pension scheme deficit (a big issue in the UK) etc.
• Use ETFs to gain exposure to a particular market
• Only use a mutual fund if the fund manager offers substantial value over the equivalent ETF

There is always a lot to learn from mistakes, and the wise ones among us learn from other people’s mistakes as much as they do from their own.

Tony has made and lost more money in the past few years,  than most investors do in their entire lifetime, and he has learned a pretty important lesson about asset allocation, which all of us need to grasp to be successful too.

I will elaborate this concept further in the coming week in a post of its own, but for now I am very keen to hear your story, and what you think of Tony’s style, and how you developed an investing style of your own, so please  leave a comment or drop me an email.

How did Indian IPOs perform this year?

There is a renewed interest in IPOs once again, and some of them have oversubscribed quite a bit lately. I was wondering what the cause of this is, and if people have really started to make money on listing gains again.

So, I took all IPOs that have come out in India this year, and saw how they performed at the end of their first trading day. The results showed that while most IPOs made money, they didn’t gain by a lot. Since most people get a fraction of stocks that they apply for – in absolute terms investors wouldn’t have made a lot of money.

It also showed that a good percentage of these IPOs were graded 2 out of 5, which shows below average fundamentals, but some of the biggest listing gains were on stocks in this grade. There were just a few that were graded 4 out of 5, but they didn’t show any spectacular gains. This is probably due to the fact that when an issue is graded – price is not considered a factor, so the IPOs with better fundamentals were priced higher initially itself.

What this data doesn’t show is how these stocks did post listing, and there I saw that some stocks with a lower grade tend to fall quite a bit following their listing, but that post is for another day.

Looking at this info-graph, I can’t really make out the reason behind the renewed interest because the results are at best mixed, and this interest is possibly more due to optimism than anything else.

The greener the shade, the higher the listing gain, and red means losses. You can hover over any square to see more details on it.

New Poll: Do you hold stocks or mutual funds as part of your portfolio?

A few days ago I ran a poll asking people if they had made any money in the stock market, and I am glad to see that the majority of you have made money in the stock market.

The other theme from comments and emails was that people had taken control of their finances, and in almost every case, invested directly in stocks.

In general, people in the know will tell you it is not wise to invest directly in stocks, as  there is a lot of research that you should be willing to do, and even if you do it – it is impossible to beat the market, so buy an index mutual fund, and be done with it.

But in the real world, I don’t think a lot of you are convinced by that argument, and that’s what today’s poll is all about. It is a simple question with three answers:

Do you hold stocks or mutual funds as part of your portfolio?

1. Stocks

2. Mutual Funds

3. Both

I have changed the position of the poll to be on the left sidebar instead of the right one, so look for it there, and take a moment to vote, then leave a comment explaining your reason. We will discuss results in a few days!

Image by melilab

The mute button in Gmail

I literally LOL’d when I saw the mute button on Gmail – what could it possibly do?

I don’t know if a lot of you have noticed it, but it is a little button at the end of the “More actions” option.


Turns out this is exactly like the new “Ignore” button in Microsoft Outlook 2010, and if you select a conversation and mute it – all future emails part of that conversation are directly archived without showing up in your inbox.

From Google Help:

If you’re subscribed to a mailing list, you’ve no doubt been subjected to the ‘thread that just won’t die!’ If you’re part of a long message conversation that isn’t relevant, you can ‘mute’ the conversation to keep all future additions out of your inbox.

By using the ‘m’ shortcut key, new messages added to the conversation bypass your inbox so that the conversation stays archived. If your address appears in the to or cc field, though, the conversation will pop back into your inbox ready for your attention.

Muted messages are not marked as read, are still searchable, and can specifically be found by searching for:


Click here to see how you can find muted conversations and turn it off as well.

Getting started as an investor? – Diversify

Reader Allwyn wrote to me a few days ago inquiring about books, and websites that help people  get started with investing, or if there was such a series here on OneMint, and since there is none, and it is such a great idea – I thought I will write one now.

In February this year, I wrote a post about 5 factors you should think about before you start investing, and to me that’s really the first post in this series.

Before you start investing, you need to develop some prudent financial habits so that you have enough savings to actually get started with investing.

Here is a quick recap of the five points:

1. Pay down your education loan

2. Don’t get into credit card debt

3. Understand Risk (or at least think about it)

4. Invest in tax saving instruments

5. Stay away from short term trading.

If you haven’t read that post, then spend some time going through that and thinking about some of the things written in that post, and how they apply to your own life. Then come back, okay?

The next prudent habit that I can think of is to create an emergency fund. A lot has been written about emergency funds, and I don’t know that I can add anything useful to the echo chamber about it, so I will skip that step, and write about something else (I will write about it or link out to other useful posts about emergency funds later in the week).

Now let me write about some boring but important stuff.


A few days ago I reproduced this amazing info-graphic from the Wall Street Cheat Sheet, and as far as the Indian markets are concerned I think we are somewhere between Optimism and Belief.


There are a lot more people interested in the stock market than when it was really down, and people are wondering where to invest their money once again, as opposed to just stuffing it in their pillows or putting it in fixed deposits.

If you are a first time investor, then there’s probably a very strong urge to invest in the stock market, and with every rise in the market, you might feel that you are missing out on the rally.

You must remember though that the market moves in cycles, and if you are starting off now, then you don’t want to put all your money in the stock market at one go, and risk losing all of it if the market crashes.

Here is a chart of the P/E multiple of Nifty for the past 10 years, and that shows you how we are at one of the higher ends.


Now it can certainly happen that the earnings of Indian companies grow consistently in the next few months or even years, and that you don’t suffer a crash at all, but it is better to diversify your savings between safe instruments like fixed deposits, and risky instruments like mutual funds and stock market, and reduce your chances of getting screwed.

There are several factors that influence how much money  you put in stocks versus fixed deposits or bond funds, but the first thing is to make a decision that some of your money will find its way into safer instruments like fixed deposits.

If the recent rise in the stock market is tempting you to go all in, and put all your money in the stocks, then resist that urge and decide to take a diversified approach.

This is certainly the boring way to go, but one that protects you in case of sudden market crashes like the ones we are only too familiar with.

Diversification is key to building long term wealth and a profitable portfolio, and an idea that you should understand and embrace early on in your quest of investing knowledge.

I will write more about diversification in a later post, as there are several factors that affect diversification, and it merits an entire post on its own right.

In the meantime, please leave comments to let me know what you think about diversification, and also about the topics that should be covered as part of this series.

Gujarat Pipavav Port IPO

Gujarat Pipavav Port is coming out with its IPO which will open on 23rd August, and close on 26th August.

The IPO is priced between Rs. 42 – 48, and has been graded 4 out of 5 by CRISIL, which denotes above average fundamentals.

Business of Gujarat Pipavav Port

The company is promoted by APM Terminals which is one of the largest container terminal operators in the world, and currently own 57.9% equity in Gujarat Pipavav.

Gujarat Pipavav operates APM Terminals Pipavav, which is India’s first private sector port, and has multi cargo and multi user operations. APM Pipavav is located in the Saurashtra region in Gujarat, and is an all weather port. It provides port handling and marine services for container cargo, bulk cargo, and LPG cargo. It commenced cargo handling operations in 1996, and container handling services in 1998. Their capacity is to handle up to 0.60 million TEUs of container cargo, and approximately 5 million tonnes of bulk cargo per year.

Here is a snapshot of how their volumes grew in the last few years. You can see that the numbers didn’t grow much from 2007 – 2008 due to the recession.


Continue reading “Gujarat Pipavav Port IPO”

How does the spend on Common Wealth Games compare to other sporting events?

Stories about the Common Wealth Games are almost always about corruption, inefficiency, and poor planning, and while we all know that paying 4000 bucks for toilet paper and 6000 bucks for umbrellas is over the top – how does the total spend compare with what other countries spend on sporting events?

I looked up CWG games spend for the last host – Australia, and found that they were able to do it in about 1 billion dollars, and were really really close to their budget. That’s quite below the 6 billion or so India will be spending, but then Australia didn’t have to spend on Infrastructure like India does.

So, let’s look at another emerging country then – China hosted the last Olympics in the most magnificent way ever, and spent about $42 billion on it!

I looked at a few other countries, and realized that these comparisons are not straight because of the definition of  what is part of Olympics, CWG or Winter Olympics spend. Emerging nations take this opportunity to upgrade their infrastructure, which will be used long after the games themselves, but a lot of it is counted as part of the games spend, and then there is the difference in size,  year of these events, and even the exchange rates.

All that said, here is a little map of sporting spend of a select few countries (mouse over to see values). Most of them are past events with the exception of India’s CWG, Brazil’s FIFA World Cup, and London’s Olympics which are estimates.

I’d say this is more fun than instructional due to the limitations I noted above, but you can still get a glimpse of how much various countries spent on these events.

Here is a list of these events along with the source of the data if you are interested. Let me know what you think.

S.No. Country Total Spend Event Year Source
1 China 42.00 Olympics 2008 Link
2 Greece 16.00 Olympics 2004 Link
3 United Kingdom 22.60 Olympics 2012 Link
4 Germany 1.40 FIFA World Cup 2006 Link
5 South Africa 5.48 FIFA World Cup 2010 Link
6 Brazil 41.70 FIFA World Cup 2014 Link
7 India 6.23 Common Wealth Games 2010 Link
8 Australia 1.00 Common Wealth Games 2006 Link
9 Canada 2.50 Winter Olympics 2010 2010 Link

Which country has the highest per capita GDP?

The Economist published a cheekily titled article – “Hello America” a few days ago. It showed a graph of the history of world GDP, and showed the share of different countries over a very long timeline.

I was a little surprised to see that China and India had so much of the global share for such a long time, but didn’t give it much thought because these are absolute numbers, and I felt what would have really been interesting would be a comparison of per capita GDP.

I had quite forgotten about it, but today I saw Econompic Data publish such a chart.


Look at those US, UK and Japan lines go – amazing right? Funny thing is that US is not even in the top 5 countries when it comes to per capita GDP.

Here is another chart I made from 2009 World Bank data (Wikipedia) that shows the per capita GDP of some of the top regions.


I was expecting to see Finland there somewhere, only because they made broadband a legal right some days ago!, but they are at 21 in this list.

How to change the color of a bar graph in excel?

Someone asked me how to change the color of a bar graph in an Excel sheet, and I thought I’d write a quick post about it since it is a fairly straightforward thing to do.

Say you have a bar graph which displays two parameters – Good and Evil, and Excel throws up a graph like this:


Now say you want to change the color of these two bars to green and red. The guy who asked me about this was right clicking on a bar, and then selecting a color from the “Shape Fill”. The trouble was that it was coloring both the bars like this.


Instead of this – double click one bar, and it will open up the “Format Data Point” dialog. Next select “Fill”, and then “Solid Fill”. Select the color you want from there, and it will only color the bar you have selected.


It just takes a few seconds, once you know it, but knowing it sometimes takes a few hits and misses.