Top 5 Asset Classes for the Middle Class
Updated: Dec 21, 2022
This article may not meet your needs, if you belong to the top 5% of the income pyramid. In India this means your income is more than INR 200,000 per month and or your personal net worth (Value of all Assets minus All Loan Liabilities) is greater than INR 20 Million. If you belong to this top 5%, you need a professional financial advisor / wealth manager / portfolio manager.
For the remaining 95% people, here are the top 5 asset classes to prioritise on:
1. Your Income Growth
Investing on your income growth has the highest ROI. If you are an average performer in your job / profession / business, your income will be growing at just about inflation rate or slightly more. No amount of savings and investment activity is going to get you off that treadmill. Assuming that long term average inflation is 6-7%, you need to find a way to grow your income by 15-20%. Yes you will have some big career jumps interspersed with annual growth. The 15-20% expectation is the long term average of both these changes. For example a person earning INR 10,000 pm in the year 2000, with a 20% CAGR income growth, would be earning INR 380,000 PM pre-tax in 2020 (I know many people who had this growth). By the same measure, If you are earning INR 100,000 PM today, you should aim to earn Rs 38,00,000 PM (not per year) in 2042.
Learning new skills on the job or taking new courses is just one way. Taking challenging assignments and initiative is another way. Saving in to an emergency fund or having some Gold to fall back on is equally important. Because only then, you will be able to take risks with your career, change jobs / profession / business and progressively align what you do with what you love to do. No one ever grew their real income in a job or profession that they did not like. When you have the buffer and head-room to make unconstrained choices, you can achieve robust income growth and happiness growth at the same time, one feeding back in to another creating a positive loop of joyful prosperity.
When you get to 60, the investments you made on yourself and the career choices you made till then, would help you remain a valuable and contributing member of the society with a decent consulting or business income for another 15-20 years. No pension plan could ever match this.
2. Your Children's Education
No amount of saving, investment and financial market participation is justified, if it is at the cost of you failing to invest in your children's education.
Most Indian parents don't invest enough time or money on their children till they reach the last 4 years of school. But often it is too late. The quality of school they go to during Age 3 to 6 and Age 6-12, has a disproportionate bearing on their future earning potential. Stretch yourself to send them to a better school than what you can easily afford. Don’t narrowly focus on their 10th and 12th board marks. When it comes to their future earning potential, independent thinking, self-learning, communication and articulation, collaborative team work – these are skills that really matter.
The money you pay for the Van / School bus, for a good school away from your home, or moving to a locality near a good school at higher rent, is also an important but often overlooked investment. Most parents prioritise convenience and cost savings and put their children in mediocre schools near their house. The result of this bad choice is visible only after 10 or 20 years.
The quality difference between schools is not going to be solved easily. For example A ICSE / IB School teacher in India, earns 3 to 5 times more than a Matriculation School Teacher. And many expensive schools are still struggling to get good quality teachers, in spite of such high salaries. And I recently heard, the state of California in the US, has shortage of teachers, because their salary is not adequate to pay rent. So unless we as a society and as parents are willing to invest in our children’s education, this inequality in educational outcomes is not going to disappear.
Pushing your child to get 99.5% and then shrugging your shoulders if they couldn’t get a good college seat, my make you feel less guilty. But a kid that has scored 80-85% (with all the above soft skills that I mentioned earlier), really deserves to go to a Private University. Even if you haven’t accumulated enough cash savings to pay for Private University, you should be able to leverage your home or gold as a collateral and get them an educational loan.
3. One House for each of your children
(Not in a village but in a Tier 1 or Tier 2 City)
Leaving each of your children with one house, is an important priority. Does not matter where they are going to settle. Does not matter if they are going to keep shifting cities. Leaving them with a place of their own, would help them to focus their future savings and investments on other things. It will give them long term capital appreciation. It will give them a rent, that they can use to pay rent elsewhere. They can use it as a collateral for a low interest loan, if and when they are short of cash to fund their children’s college or marriage.
Subtract the value of the property (full or partial) that you and your spouse will inherit from your parents. Calculate, the balance investment required, to leave a house each for your children. The best approach to invest in this asset class, is to take a home loan and pay EMI at close to inflation rate interest. While the real value of the EMI you pay, keeps going down due to inflation, the property appreciates in value over time. This is also a kind of forced saving, as we will never stop paying the EMI. Whereas, it is much easier to stop a mutual fund SIP and spend the amount saved.
Even if you can’t afford a house or housing loan right away, set aside your savings for accumulating the down-payment (15-20% of the property value, balance will be the loan). Another method is to take a land loan for an approved plot and build on that later. Or sell the plot to buy property elsewhere.
4. Min 500 to Max 1000 grams of Gold per Child
Gold is a risk free and inflation proof asset that is ideal for inter-generational wealth transfer. Look at the gold price appreciation from 1960-80, 1980-2000 and 2000-2020. Also note that the interest rate on a gold loan is close to inflation rate, whereas an unsecured loan costs a lot more. So even if you save and invest in financial markets, this basic minimum level of Gold accumulation / holding, diversifies your portfolio and minimises risk.
You should of course subtract the Gold that you and your spouse will inherit from your parents and arrive at the balance as your Goal. If you reach this goal in your life time, your children can just pass it on to the next generation and would focus their savings and investments on other things.
5. Passive Index Fund (Example NIFTY 50 or NIFTY 100)
After allocating to the above 4 asset classes, you could invest may be up to 10% of your income in a Passive Index fund. And let it grow over the long term (10-20-30 years). This allows you to participate in the growth of the economy, without having to bet on specific sectors, themes or companies.
The 6th Asset Class: Equities.
If you belong to the 95%, I doubt whether you will have any surplus left after allocating to the above 5 asset classes. I don’t recommend equal distribution across asset classes. Giving priority to the top 5 asset classes, in the order of priority discussed above, is necessary. If you still have some surplus left, surplus that you can risk, only then you should invest in Equities.
Mutual funds may appear less risky than Equities. But each fund house has 100s of funds and so you have 1000+ funds to choose from. Different funds perform differently during different periods. So choosing a fund or a sector or a theme, is akin to betting on that theme or sector. It is not very risky in the sense, you may not lose your capital. But the risk and probability of average or underperformance (as compared to index funds) is quite high.
Betting on specific company shares, is more risky. But the risk reward ratio would be better, if you have done sufficient research, you have spread out your savings across a diverse portfolio and you stay invested over medium to long term.
In today’s world of instant information and highly literate financial communities, finding investment opportunities that will outperform the market over the long term, is not easy. The markets are in general more intelligent than any individual.
So we again circle back to Asset Class No 5. For middle class individuals, Passive index funds are the most cost effective and easy way to participate in the market. For those who belong to the top 5% of the income pyramid, whose investible surplus is much higher, please take the help of a qualified advisor.
Ramkumar R S, is the founder of Save First Foundation, a volunteer lead, not for profit organisation focused on promoting long term savings among middle class individuals. He is also the founder and CEO of milliGOLD. For free one to one, personalized financial counselling sessions (1 hour), please book your appointment at www.savefirstfoundation.com or contact email@example.com
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