Old women playing board game. (Photographer: Yuriko Nakao/Bloomberg)

How To Build A Goal-Based Portfolio

Almost 95 percent of Indian savings are in physical assets like real estate, gold and consumer goods that don’t generate income. There’s a need to re-balance the portfolio towards financial assets.

That’s the advice from Saurabh Mukherjea, Rakshit Ranjan and Pranab Uniyal of investment bank and brokerage Ambit Capital on BloombergQuint’s new show Portfolio. The authors of ‘Coffee Can Investing’, a book that explores the low-risk route to financial freedom, said their calculations suggest that retirees need a corpus of at least Rs 15 crore for generating an income of Rs 50 lakh to Rs 1 crore, which is necessary for a comfortable post-working life.

They encountered a lot of investors in their late 40s who didn’t have a decent corpus for retirement, said Mukherjea, chief executive officer at Ambit Capital. And even if investors had assets, there’s no cash flow, prohibiting a return of anywhere near 10 percent, he said. Any portfolio, according to him, would need to generate at least 10 percent returns to beat inflation, and about 15 to lead a comfortable life.

But retirement can be only one of the goals. The objective of savings can range from saving for a child’s education to buying a house. That’s why Uniyal stressed on goal-based asset allocation. That helps an investor assess if investments and allocation will be sufficient enough to achieve a goal, he said.

At times, investors might have lofty goals and not the capability to meet them. In such cases, Uniyal advised a review. And a rule of thumb for asset allocation: the proportion of investments going to equities should be 100 minus an investor’s age.

A well-constructed portfolio, left untouched for a long period of time, would be able to generate more returns than a one with a higher degree of churn, said Ranjan, who manages the ‘Coffee Can’ portfolio at Ambit Capital. Such a portfolio would generate returns consistently and lead to significant wealth creation over the years due to the power of compounding. He said the basic math is:

“A run rate of 26 percent per annum return would mean growth of 10 times in 10 years and 100 times in 20 years.”

He suggests that companies chosen with consistent revenue growth and superior return on capital employed will be able to give outsized returns. The two parameters are important for ‘Coffee Can’ investing because Sensex returns have mirrored the long-term earnings growth in the last few years.

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