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Investing in real estate to earn rental income? Don’t, says Kamlesh Rao, MD and CEO, Aditya Birla Sunlife Insurance

The general thumb rule for equity investment is that the allocation to this asset class should be 100 minus your age.

Kamlesh Rao, MD and CEO, Aditya Birla Life Insurance, however, believes the asset allocation depends more on your isk profile – whether it’s low, medium or high risk.

A banking and financial services industry veteran with a career spanning over 25 years, Rao was the Managing Director and CEO – Retail at Kotak Securities prior to joining the Aditya Birla group. He believes that given the current volatility in the equity markets, investing a lump-sum of Rs 10 lakh at one go is not the right approach. Investment should be staggered over a period of 12-18 months.

He is not a fan of real estate investing. Low rental yields are a big negative for him. Instead, he advocates investing in annuity plans around the age of 45-50 years. After the age of 60, the annuity payouts will act as the income replacement avenue that you need to enjoy the same lifestyle which you are enjoying now.

Nearly 75 percent of his allocation is towards equities now, and the rest largely in debt instruments. Out of this, 10-12 percent is allocated to annuity plans that will ensure a steady stream of income post the age of 50.

How should investors approach equity markets now? Is this the right time to increase allocation to equities?

Equity markets go through different phases. Sometimes, you get a sense that the quantum of upside is higher than that of the downside, and that is the ideal time to be in the markets.

For instance, when you see that the chances of Nifty going up by 20 percent are higher than of the index going down by 10 percent, that normally is the time when you should look at investing lump-sum money. At the moment, however, my sense is that equity markets in India are not in that phase. It is a volatile period.

I am not a strong advocate of lump-sum allocation in times like these. It is best to keep investing systematically. If you have a large amount to invest, do not invest at one ago. Stagger it over a period of 12 to 18 months.

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Bond yields have gone up significantly so far this year. What about debt investments in the current interest rate scenario?

A lot of retail investors who put their money in debt markets do not seem to understand whether they are taking interest rate risk or credit risk or a combination of both.

Interest risk is still worth taking – invest in the kind of schemes that bet on rising rates, as the high-interest rate scenario is likely to stay in India for a reasonable period of time.

This is because we have just come out of a low-interest rate scenario, which was driven by a purpose. In a country where inflation is around 5-6 percent, you cannot have interest rates that are lower.

Those with medium or low risk appetite should not invest in debt instruments that entail credit risk. Stay invested in debt schemes that are driven by interest rates.

What are the key risks that retail investors ought to avoid across asset classes?

Greed and hope are the two emotions you need to stay away from. Hope is when you know it is the right time to get out of your investment (due to poor performance), but you stay on hoping that it will bounce back.

And greed comes in when you know you have realised your return expectations and it is a good time to get out, yet you chase even higher returns. For instance, if your goal was to achieve 15 percent return, it is a good time to get out once your expectations are realised, instead of staying on in the hope that it will touch 25 percent. This is where bulk of the mistakes are made.

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How should a retail investor with investible surplus of Rs 10 lakh deploy this lump-sum now?

A lot depends on your risk profile – whether it’s low, medium or high risk – more than age. You need to be in equity for sure. I would put 40-50 percent of the money in equities.

I would first park this money in a liquid fund and invest it systematically over the next 12-18 months, rather than investing at one go. I would allocate at least 10-12 percent of the money towards schemes that will help me generate annuities so as to ensure a steady stream of income post the age of 50. The balance can go towards debt and fixed deposits.

What are your views on the traditional favourites – gold and real estate?

I am not a great advocate of investing in gold. Real estate does always return your money, but you should consider that option after making sure that you have your own house. Make sure that you create this opportunity in your 30s. It is a great asset and once you pay that off, in a way, you would have taken care of the liability of paying rent in future years.

I am not in favour of investing in a property to earn rental income. Rental yields in India are around 3-4 percent; even a bank savings account can offer that much. And, commercial property is something that most retail investors will not understand. If you are investing in property for the capital appreciation it can offer, over 10 years returns from real estate and equities would be comparable in India. Investment from a rental income perspective, however, is a no-no.

How do you invest your own money?

I invest 75 percent in direct equities. The rest is in mutual funds, largely in debt instruments. A part of it is allocated towards annuity plans. To ensure that you enjoy the same lifestyle after the age of 60, you have to invest right. Annuities will be a kind of income replacement for you after 60.

This apart, I have also invested in health insurance. Health expenses in India have gone up significantly, so I have a health insurance cover of around Rs 40 lakh for my family.

Likewise, term insurance is extremely important. The ideal cover depends on your age, life-stage and responsibilities. For instance, in your 30s, you should worry about the housing loan you have taken. It is the biggest liability anyone has in India. Therefore, your term cover should be at least twice the amount of your housing loan.

Your investment mantra…Stay away from greed and hope, the biggest enemies in your investment journey. Whatever you can save every month, invest systematically. Ensure that you have the discipline to never get tempted to stop the investment in favour of some big-ticket expense or other needs. The whole idea is to invest regularly over a 20-30-year period. No fund manager can beat the consistency that you would have created in the investment process.