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Asset allocation: What percentage should you allocate to each investment?

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Asset allocation: What percentage should you allocate to each investment?

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In order to meet the lifecycle goals, it’s important for every individual to draw out a comprehensive financial planning road map.

Asset allocation: What percentage should you allocate to each investment?
In order to meet the lifecycle goals, it’s important for every individual to draw out a comprehensive financial planning road map. While expenses, savings and investment strategy may differ from one person to another, there are some basic rules which can be followed to secure the financial future.
According to Anil Lobo—a seasoned retirement and employee benefits consultant and Oliver Sequeira—a professional financial planner, Elizabeth Warren's 50/30/20 thumb rule can be used to manage one’s budget.
“50 percent of earnings may be set aside for essential needs that cannot be compromised. The 30 percent of earnings set aside for discretionary expenses can be leveraged to augment one's savings. COVID-19 has taught people to control avoidable expenses and enhance savings higher than 20 percent. This should help plan for short/mid and long-term wealth creation,” they opine.
Here’s how one should decide the percentage of allocation to different money needs:
Emergency Funds
According to Lobo and Sequeria, one should make adequate provisions for emergencies as it is an essential corpus in case of an eventuality. If just one member is earning and he/she has multiple dependents, it’s better to have at least 12 months of emergency funds, while if there is more than one earning member, this can be reduced to 6 months.
Emergency funds can be built gradually with conscious efforts in setting aside funds and by creating a decent corpus.
“It would be ideal to have a good mix of fixed assets, for example, liquid funds, short term RD’s, Flexi FD’s or debt mutual funds so that it could be withdrawn with no delay and with not much loss or exit loads,” they recommend.
Health Insurance
Lobo and Sequeria advice to have a family floater cover of at least Rs 5 lakh, with a top cover of Rs 15 to 20 lakh. Top-up health insurance policy helps in enhancing the cover at a low cost. This could help complement the group health coverage offered by the employer.
Having individual health insurance means the policyholder is still covered in case of the eventuality of not being in employment.
Life Cover
One should have adequate term life cover against all the borrowings like home, vehicle and personal loans.
Lobo and Sequeria suggest to have a life cover of at least 15 to 20 times of one’s annual income preferably a term insurance cover, as it is pure life cover without any frills. This should be irrespective of the employer providing with group term life cover.
Retirement Corpus
Many experts in the field say 70 percent to 80 percent of last income pre-retirement must be provided to maintain the lifestyle one is used to during the active life. With the rising cost of medical expenses, this becomes imperative.
"If in employment with the statutory benefits like PF and gratuity, one can expect 25 percent to 30 percent income replacement. This can be further enhanced by another 5 percent to 10 percent by contributing to NPS. The remaining gap must be met by making conscious efforts with other personal savings depending on one’s life stage and risk appetite," Lobo and Sequeria opine.
Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
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