Young adults are perhaps the richest amongst all of us. They have something more than all of us - "time", they are at an age when the possibilities are unlimited. In case you are a young adult in 30s or a parent / guardian with children approaching or are in their 20s, this article is for you. The article tells us few things which perhaps we were never told when we were young. We bring to you six valuable investment guidelines that can literally make a huge impact in lives of young adults.

1. Learn about Personal Finance & Investing :
Knowledge about personal Finance topics and investing at an early age is a great asset. Young adults must know about different asset classes, investment products, insurance, loans & credit, time value of money, inflation, savings, taxation, ¬financial planning, etc. Such knowledge, especially during early years of your career can really help you take great decisions for future. If you are a guardian, be sure to involve the young adults in your own investment decisions. There are many ways in which young adults can gain financial knowledge. Some of the ways are reading good investment books, reading ¬finance magazines, interacting with financial advisors, accountants, successful investors in family/friends, and so on.

2. Control Your Spendings :
Young adults are perhaps the most valued consumers hunted by every big brand ranging from cars to shoes to laptops to even holiday packages. With the newly gained earning power and lack of big responsibilities, it is natural that spendings on entertainment, gadgets, accessories, hanging out / parties, etc. form a big chunk of the spendings. Surely it is the time to enjoy life but young adults are advised to control their urge to spurge and not make impulsive decisions. It would be great if one can budget such spendings and avoid taking big decisions like buying motorbikes, cars, laptops, etc. without adequate thinking and research.

3. Start Investing Immediately
We have often spoken on this topic. The benefits of saving early can never be under estimated. Even if the savings is small, due to the power of compounding, the wealth created by you can be enormous. This may easily surpass the wealth created even with increased savings but started after a few years. You may be surprised how much difference will be there in the end value just by starting early.

4. Get PAN & Start Filing Tax Returns:
Filling of ITR has many advantages as they are considered standard income proofs globally and they help you while applying for loans, visa applications for jobs abroad, requesting tax refunds, etc. The PAN issued by IT authority is a prerequisite for filling ITR and is also mandatory for many financial ¬transactions. There is a perception that if the taxes are paid, there is no need to file ITR. This is a misconception and it is essential to know that it is our obligation to file the ITR when you are required to do so. Further, still many believe that their incomes are too small to attract the attention of IT authorities and get tax scrutiny and hence may indulge in non filing of returns or understating income. You may note that IT authorities uses a system whereby cases are picked up randomly on certain criteria. You may never like to be the one to get short-listed and invite unnecessary hassles. Remember that you are permitted to save taxes, but not evade taxes.

5. Get Health & Life Cover:
Getting adequate protection at a young age, where people tend to be more adventurous, is highly advised, even if there aren't any dependents on you. Buying health or life cover at a younger age is also considerably cheaper than buying the same after few years. Such protection can really help one in case there is any unforeseen emergency and financial burden on parents will be avoided.

6. Start Thinking About Home:
The average age of home & car buyers has decreased drastically in the last 20 years. Powered by easy availability of loans, fat pay packages & growing aspirations, the first time home buyer today is often around the age of 30. The first time car buyers are even younger. It would thus be best advised that young adults keep these goals in mind and start saving as much as possible for home & car goals, if any, from now onwards. It would really benefit you a lot when the time comes for purchase in near future. Often young adults delay saving for the goal and end up paying lesser down-payments and taking higher amount of loans which should be avoided. Lastly, even if you have a home of your own, it is advisable to think of buying a home as an investment for future and also enjoy tax benefits on same. Having time on your side is a great advantage and never to be missed. Few young adults may choose to ignore & not act on 6 guidelines shared above at their own peril. Experience has shown that wise decisions, actions and discipline in these formative years go a long way in securing a better ¬financial future down the line. Simple actions taken today can help you avoid taking tough decisions at times when you have family to support and lot of responsibilities on your hands. So go ahead and make the best that this time has be offer, smartly.

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As an investor, one should have the basic understanding of asset allocation, irrespective of how literate or experienced you may be. It is at the heart of portfolio management for investors and as studies have indicated, it is also the primary determinant of portfolio returns over time. In this article, we take a closer look at this key element that we all must adopt, manage & track in our overall investment portfolio.

Why Asset Allocation?
As a definition, asset allocation means an investment strategy that aims to balance risk and reward by distributing a portfolio's assets according to individual needs & profile. There are three main asset classes - equities, ¬fixed-income and cash & equivalents.

A clear justification for asset allocation is the logic that different asset classes having different characteristics will offer returns that are less correlated to each other. Thus, essentially with asset allocation we are 'diversifying' and reducing the overall risks of the portfolio as one asset class may outperform the other and thereby reducing the volatility of returns for a given level of returns expectation. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions.

Many ¬financial experts also argue that asset allocation is the most important factor in determining returns for an investment portfolio. Various studies done by expert point to the fact that asset allocation could explain over 90% of the returns from a portfolio in long term as opposed to superior product selection or market timing.

Determining Your Asset Allocation :
While there may be guiding lights, there is no standard rule or ratio of asset allocation which can easily ¬t everyone. Determining the asset allocation is a personal decision much like tailoring your own suit. There are many factors that play an important role in determining asset allocation but the following are the most important ones...

Investor Risk Profile:
Your risk profile or tolerance level is your ability and willingness to absorb large fluctuations in the value of your investments. It is kind of an indicator that measures your comfort, patience and con¬confidence to not panic and sell at the wrong time while continuing to be ¬financially sound. There are a lot of things that impact your profile, including awareness, understanding of markets, your ¬financial soundness, earnings capacity and lastly the ability to keep your emotions under control.

Investment Horizon:
The investment horizon is an important determinant of asset allocation as different asset classes have different ideal investment horizons. They may be expected to behave in a certain manner with reasonable confidence based on their own characteristics & market cycles. For e.g., the equity asset class, being volatile in short term should only be looked at if investment horizons extend long enough in the future.

Investment Goals/Targets:
Another determinant of asset allocation is the returns expectation or requirement you may have from your investment in order to achieve a financial/life goal or target. You may be end up up deciding an asset allocation solely from the point of view of achieving that goal. For e.g., a person in late 40s may suddenly realize that he needs to save for retirement in just 12 years. Now, the only way to maximize the retirement kitty would be to invest in equities which have the highest returns potential, irrespective of his risk profile but keeping in mind the horizon which is long enough for equity returns to be more realistic.

The Asset Classes : Asset classes can be seen as buckets of investment products /avenues which display similar risk-return characteristics. There is three basic 'traditional' asset classes as already highlighted earlier which you may look at for investing – depending your need & profile. For private circulation only

1. Equities:
   

   This includes direct equity stocks, equity mutual fund schemes, equity PMS and ETFs. Some experts also include private equity and business investments in this asset class. Equities are risky but also hold promise for higher returns. One may reduce the risk of direct equities by investing in equity mutual fund schemes which have diversified portfolios of stocks managed by experts.

   • Within equities, asset allocation may be done on basis of the size of the company or it's market capitalization. Thus one can diversify into large-cap, mid-cap, small-cap stocks or funds. There are also diversified and blend (two or more market caps) funds available for investors to choose from.
   • One may even have diversification based on country with funds investing in domestic markets and in foreign markets. But with India, being the fastest growing economy globally, there is little sense to look for opportunities elsewhere.
2. Fixed Income:
   

   This asset class gives more assured form of returns that accrue in form of interest income and due to fluctuations in bond prices triggered by interest rate cycles. It covers instruments like time deposits, government small savings schemes, bonds, corporate deposits, government papers, etc. While it may not be easy for everyone to participate in bond markets in India just like they do in equity markets, mutual funds do present us with a very easy and familiar route to invest in such products.

   • Your total asset allocation should include the debt portion of your traditional investments into bank time deposits, PPF, EPF, small saving schemes, etc. along with investments into mutual fund debt schemes.
   • Mutual fund debt schemes offer lot of options with a wide range of fund types that offer different sets of risk-return horizon within debt asset class. One can do a deeper level asset allocation of debt into these broad category of funds. This will be meaningful only if you have debt, especially mutual fund debt schemes, as a significant part of your portfolio.
3. Cash & Equivalents:
   

   This asset class is the least riskiest but also one that gives the least /no returns. It broadly includes Cash and equivalents like deposit account with banks and money market mutual fund schemes. Some amount of investments should be made into this asset class to have liquidity for emergency purposes and for meeting maturing goals.

   • Alternative Asset Classes: Apart from the above three primary asset classes, many ¬financial planning experts also consider few other asset classes depending on the investors they advice.
   • Commodities: A popular avenue for Indians, this includes precious metals (like gold, silver), agriculture, energy, etc.
   • Real Estate: Again an important 'investment' avenue for us, it includes commercial or residential real estate and REITs or Real Estate Investment Trusts.
   • Collectibles: A slow emerging category for wealthy Indians, collectibles includes things like art, paintings, coins, stamps, wine, etc.
   • Others: Foreign currency, derivatives, etc. also can be considered as asset classes but which are not recommended or suitable for individual investors.

Managing Your Asset Allocation :

1. Do It Your-self
   

   If you had been investing and trying to manage your funds yourself, and want to keep it that way, you will need to take care of the following:

   • Maintain consolidated records for all investment classes. And remember not to skip anything as most of us ignore our traditional /realty investments and only consider stocks & mutual funds for asset allocation which gives us a very misleading picture.
   • Find the right asset allocation suitable for you and/or decide asset allocation for each of your -financial goals. This is not easy even though there many risk pro¬ling tools available on-line. Execute the asset allocation and regularly review the same over time. Again this may require a lot of your involvement and time commitment.
2. Do It Through Your Advisor
   

   Investing through your ¬financial advisor /planner or wealth manager seems to be a very logical and the right thing to do. Your ¬financial advisor who ideally would be experienced in assessing risk profile and determining asset allocation would easily guide you to knowing your ideal and existing asset allocation. He/she would also be in a position to monitor and recommend changes in your portfolio on a regular basis. Your ¬financial advisor also has access to more refined product like MARS which manage your asset allocation through an automated process making things much more easier for you.

   The value which a - financial advisor may add in terms of managing your asset allocation is immense. Here are a few things that he/she can offer..

   • Access to a much wider range of asset classes and product choices.
   • Timely /regular portfolio reporting & tracking services for all your assets.
   • Regular review and re-balancing of asset allocation.
   • Discipline & commitment to follow asset allocation for achieving life goals

   We believe, based on our experience, it is very difficult for individual investors to follow asset allocation with discipline without ¬financial advisors. With a good advisor on your side, your portfolio should too potentially outperform a portfolio which does not follow the asset allocation approach to managing investments.

Conclusion :
There is no doubt that asset allocation brings discipline and gives the answer to the big question – when to buy & sell at an asset class level. Following an asset allocation approach to managing investments can yield great results over time. Taking the active help of your ¬financial advisor in managing the asset allocation is the way to go forward.

Personal risk management is a subject very commonly related with insurance, though the scope of it goes far beyond life insurance or general insurance policies available to individuals. Insurance is but only an important part of your personal risk management. There are different approaches to managing risk and it is in our interests that we know and understand them.

Risk management is the identification, assessment, and prioritization of risks (de fined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events [1]or to maximize the realization of opportunities. Risk management's objective is to assure uncertainty does not deflect the endeavor from the business goals.[2]

Risk Avoidance:
Risk avoidance is the first important method of risk management. Risk avoidance is the elimination of hazards, activities and exposures that can negatively affect an our health, well-being and assets. In other words, it deals with eliminating any exposure of risk that poses a potential loss i.e. not doing something that carries risks.

Depending on the circumstances, we may have opportunity to completely or partially avoid risks or not to avoid it at all. A change in our behaviour and attitude by becoming more cautious, careful and diligent can help use avoid most of the risks in our lives. The following examples will make things more clear...

Avoiding Accidents:
Following traffic rules, not over-speeding, wearing seat belts /helmets, knowing your body limits, avoiding adventure sports, always using proper safety gear, etc.

Avoiding bad Health:
Not smoking or drinking, taking regular medical tests, exercising regularly, eating properly, etc.

Avoiding damage /loss of Assets:
Using safe lockers at home, keeping valuables in bank lockers, using strong locks in shops, keeping re extinguishers handy, installing CCTV cameras, etc.

Risk Reduction:
Risk reduction refers to the precautions you can take to reduce the amount of loss in the event of the risk materializing into one. Risk reduction is a step that logically comes after risk avoidance where you are not able to avoid the risk completely. There are different methods of reducing risk for eg. Reducing the risk exposure Spreading /diversifying the risk Making a contingency fund ready for an event Being prepared with proper post event situation/actions Reducing costs /expenses in treatment/ rehabilitation Hedging the risk by doing something that will pro t when event occurs

Risk Retention:
Risk retention involves accepting the loss from a risk when it occurs. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against like war, flood, etc. Risk retention normally would happen when …

• The risk cannot be transferred or insured.
• The risks are small and losses are nominal in nature.
• Cost of insuring against the risk would be greater over time than the total losses sustained.
• You have the capacity & willingness to bear losses easily

A very common example of risk retention can be found in insurance policies which is known as – Deductible. A deductible means the amount which the policy holder has to bear before the insurance company starts to repay the claim. For eg. In a health policy, of say 5 Lacs, R10,000 is the deductible meaning you will bear claim expenses up to R10,000.

Risk Sharing:
Risk sharing is where you share your burden of risk or loss with others. The most common and effective form of doing so is to buy an insurance policy. Also known as "risk distribution" it works on the logic that the cumulative premium from a group of policyholders is more than enough to cover the losses from all the events happening in that group based on probability. This group of individuals typically carry similar characteristics and probability for the risk happening.

When you buy an insurance policy, the following things have to be kept in mind...

• Understand & compare the policy features & coverage properly
• Know the policy exclusions properly
• Disclose family & past history, habits, per-existing diseases, etc. honestly
• Fill ll the proposal form personally and do not sign an unfilled form

Adopting A Sound Risk Management Approach:
A question now arises as to how you will manage your risks? There is a suggested process to follow if you desire to do this yourself. No doubt, by following the below mentioned process, you will have a much better understanding and awareness of the risks that you carry with yourself while resulting into a situation where your risks are well covered at the least cost possible .

The risk management process is to Identify all the risks you are exposed to in your personal & work life Assess your vulnerability or probability of a risk event happening Estimate the financial loss /damage in case of each event happening Estimate the cost of transferring, reducing or retaining each type of risk Identify the right way to manage each risk type.

As an early 30's person, you must be recently married with or without a kid, or about to be married. Your parents and family is dependent on you and you have a whole list of targets which you want to achieve in life. You must be in the middle stage of your professional life and looking forward to own a house and a car or upgrade the existing in the near future.

Most people at this time take impulsive decisions and pay for them for the rest of their life. Some common mistakes that people in their early 30's tend to make are:

• People are mostly under insured. Most corporate employees rely on the corporate medical insurance.
• Early 30's is an age where we don't want to compromise on our lifestyle. People end up buying big luxury flats, which is something they don't require or afford at this age.
• Our tax saving is not properly planned. Usually we end up buying random traditional tax saving schemes at the end of the year.
• People may be modern in other things, but when it comes to investments; they will follow their parents and stick to conventional instruments of investments. Some might try their hands in the equity market, but with improper knowledge and guidance, they spoil everything and then return to conventional instruments.
• Investments are not aligned to goals. People invest randomly without calculating if they are sufficient to meet their goals or will that investment mature when needed.
• People think that it is too early to plan for retirement and they have the whole life to earn and save for retirement.
• People don't plan for emergencies. And many of them rely on investments / assets to meet these expenses when such emergencies arise.

You you need to polish your financial skills and plan your life as a financially intelligent person so that you can be financially much better later on. The idea is, not committing the silly mistakes, which an average Indian of your age would be making, and be smart in managing your finances.

Let's analyze our position and see if we are on the right track and if not, change the details where are going off track

Insurance:

• Medical: The insurance provided by the company usually does not include family, secondly the cover is small, and thirdly it will be gone in case of a job change. So, an individual would need another medical insurance for himself and his family. He can go for a family floater including his parents, wife and kids. The amount of the cover should be set keeping in mind the high medical costs plus the age of your parents. Another option is to buy a family floater with a relatively small protection and smaller premium and get a separate policy for your parents.

• Life: Most people view insurance as an investment and have traditional life endowment plans, but the premiums of these policies are very high and a corpus is created providing nominal returns. These plans however, do not serve the purpose, since the protection is not enough to take care of the family in case of any mishap. It would be best to go for a pure protection plans with big covers, which should be enough to support your family. The monthly premium would also be significantly lower for such policies taken at a younger age.
• Personal Accident: Most life and the health policies are structured such that they are useless if you meet any accident. Any permanent or temporary disability and hospitalization due to accident can ruin a bright future for you and your family. A comprehensive personal accident cover for a large sum is most adviced at this age where you are a bit more accident prone.

Car:

If you already have a car, the sale proceeds of this car can be used as a down payment for the next in line upgrade, and if you do not have one and can afford one, you have to arrange for the down payment from your existing savings or future bonus or may be start an SIP for this purpose. With professional growth and salary hikes, you would be able to manage the increased installments. If you have a decently working car without EMIs, we strongly suggest to continue with the car for couple of years more and instead make additional savings (in lieu of car loan EMI) during the period. This will help you save more for higher down payment and/or a better car.

Emergencies:

It is recommended that you save around 3 to 6 months of monthly cash inflow /income as emergency funds. This does not mean that you need to keep cash at home; the idea is to keep money in reasonably liquid investment avenues like liquid /debt mutual fund schemes. Emergency funds are needed for those long gaps between job change or any unexpected event might lead to need for money to meet the family's daily expenses.

House:

There is often a debate on whether you should buy or rent a home and it is often pointed out renting is better. But buying a home is often more driven by emotions and social pressures than pure finance. If is also better to delay the buying decision for home and start saving aggressively for same with a target of say buying home at age 40. By then you will have adequate wealth already created to buy a decent home and without too much of financial burden.

If you have decided on buying a home, firstly analyze your requirement according to your income and family members. Don't aim for a house which is too big to fit in your pocket as you can always trade the one you have for a bigger one later in life. Always take a life cover / insurance with you home loan to not burden your family in case any eventuality happens.

Retirement: If you are in a private job, you won't get any pension. You might have EPF and PPF, but these have lower interest rates which will mostly be offset by inflation. So, in order have a huge corpus at the time of retirement to maintain your lifestyle, you should change your strategy and divert the money towards equity, as amount invested in equity over a long term can yield returns higher than any other mode of investment. You may start an SIP and continue with the EPF and PPF, but with the minimum required amount. These will provide for your annual tax saving investments plus will serve as an investment for retirement too.

Putting some money towards retirement at this age is highly recommended since time is your friend for a comfortable retirement. With the power of compounding in equities over say 2-3 decades, your wealth can be substantially boosted which can never be made up even with much higher savings later.

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