Apparently, money makes the world go round (it doesn’t actually, though it helps a little). I continue to be stunned into silence by the lack of financial planning of most people I know. They spend more time in choosing a smartphone worth Rs 20 or 30000 than in planning their financials. More often than not, their attitude towards investment is biased towards real estate (porrporrtee for my Punju friends) and gold, which incidentally are two of the lowest return and illiquid (not to mention the black money angle !) investments.

I strongly believe that every person regardless of age and net worth, should sit down and evaluate his – her financial investments from scratch. While I am no expert, and am not licensed or certified yet to give financial advice, let me still share my thoughts on this culled from personal experience – which I call the 5×20 approach to financial planning.

Essentially, the 5×20 approach suggests that each person could put his – her investible surplus (excluding real estate and gold) into 5 buckets of 20% each. With the Potential Risk and Expected Returns of each mentioned (all in the Indian context).

BUCKET A : Near zero risk. Cash in hand and bank, fixed deposits, government bonds.
Risk : near 0%. Return 5-6%.

BUCKET B : Low risk : Debt mutual funds of a reputed fund house (with the steadiest of them all probably being HDFC and Prudential ICICI and Franklin Templeton).
Risk : 3 to 4%. Return 8-10%.

BUCKET C : Medium Risk : Large cap equity mutual funds with money that you can park away for a minimum of 5 years. Follow the SIP route.
Risk : 5 to 10%. Return 12 to 20%.

BUCKET D : 20% : Medium to High risk : Directly into equity. Blue chip stocks that you own in your demat account. Again with a 5 year timeframe. Choose a max of 15-20 stocks that have a proven track record, in a solid industry, good corporate governance and rising income and profits for the last 5 years. Spend some time in reading and doing your homework on this. And take the advice of a Certified Financial Adviser (not your broker who has a vested interest in you trading frequently !). Be a mini Warren Buffett. Review your portfolio at least quarterly. Buy more and be brave when others are scared and the market tanks occasionally, as it inevitably will.
Risk : 10%. Return : 20% pa over 5 years.

BUCKET E : High risk. Small and mid cap stocks both as a mutual fund, as well as in your demat account. The future blue chips. Catching a Bajaj Finance or Motherson Sumi, but when they are young and unknown. Buy with the intent of keeping them for 5 years, but watch them like a hawk – with a strict stop loss in place – be clinical about selling any that loses more than, say 20%, versus your purchase price. If you buy 15 well chosen stocks in this bucket, then chances are that at least 3 to 4 of them will go up 5 to 10 times over 5 years. And if you can invest the time and energy to understand derivatives with a good coach (futures and options in equity, commodities and forex), then consider setting aside 3 to 5% of your money for this space. Overall, invest in all three (small and mid caps mutual fund, direct equity in demat and derivatives) only if you can spare some hours daily and weekly into analysis. If you can’t, focus your money here into just the small and mid cap mutual funds, both lumpsum and through a SIP. justify : 15%. Return : 30% pa over 5 years.

You can make minor adjustments in these buckets (plus minus 5%) basis your age and investment mindset (conservative, moderate, aggressive).
For example,
– if you are 30 and or aggressive, you could choose your investments as 15%, 15%, 20%, 25% and 25% respectively into Buckets A, B, C, D and E.
– if you are 40 and or moderate, it could be the 20%, 20%, 20%, 20% and 20%.
– if you are 50 and or conservative, it could be 25%, 30%, 20%, 15% and 10%.

There you have it. A simple thought process to demystify a complex issue.

The objective of my sharing this is NOT to give you a pat solution. It’s to set you thinking on this very important issue for you. If this has stimulated you, please sit down with a pen and paper and list your current investments. Set up a meeting with a good Investment Planner (please don’t call me, I am not certified plus I am NOT in the professional financial planning space) and invest (pun intended) the time and energy one time to put your financial house in order. And hopefully, set you on the road to dramatically improving your financial futures.

And yes, at the end of the day, if it all works out wonderfully for you, remember to call me over to celebrate with a glass (or two) of some good wine.

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Also published on Medium.