Investors (let me not confuse you with savers, here, I am not making a distinction) – come in many forms. Those who have no appetite for variability (wrongly termed as risk) think cash is the safest form of investing.
Is it? well there are 3 things which destroy it:
Over long periods inflation can (and will) destroy money that is kept in cash. Assuming cash means savings bank – you will get about 4% return on your money and on that you will end up paying 30% income tax. Ouch, it hurts. In an economy with inflation impacting you by about 12% p.a. this means your MONEY is de-growing at 10%. Give or take one or 2 years, your money will be destroyed in about 12 years time ASSUMING you do not withdraw at all.
What if the portfolio has say 70% bonds? Well bonds too will try to combat HEADLINE inflation – or the Wholesale prices. So at least say 70% of your portfolio will FIGHT (a losing) battle with inflation, so the run to zero will take a little longer – say 20 years time. Your portfolio will run to zero for sure.
What about a portfolio with about 30% in good quality equities (a.k.a Index). This portfolio should do well over a long period of time. Typically a pension plan or a child plan (having a 20-30 year view) has this combination. The equity portion makes sure that inflation is combated well and the equity provides for the growth. The assumption of course is that the 70% in debt is in bond funds / good quality bonds so that it provides stability and there is no market risk of the bonds.
What about a portfolio which has about 70% in equities and about 30% in debt instruments? This is the portfolio of Hdfc Prudence fund – and the universally classic asset allocation fund. 70% in high quality equity and 30% in good quality bonds. Why is this work being done by one fund? Simply because when the fund manager does the re-balancing instead of the client doing the re-balancing the portfolio by he himself.
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