Most of us have read the tale of “the rabbit and the turtle” in our schooldays. Let's recall the tale and refresh our childhood.

Once upon a time, there was a rabbit, who was overconfident because of his abilities. The rabbit used to boast about his skills and he used to make fun of a turtle since the latter was very slow. The turtle got really annoyed with the rabbit's behavior and one day, he challenged the rabbit for a race. The rabbit on hearing this, mocked the turtle believing that there is no chance that he can win, and they agreed to race.

The next morning, they reached the starting point and the rabbit pulled up his socks, still mocking at  the turtle. They started and the rabbit instantly picked up pace, while the turtle started the race taking baby steps, the rabbit leaped high and left the turtle far behind in no time.

Midway, the rabbit saw a restaurant, and he was feeling hungry too, he looked around and the turtle reached nowhere near him, so he decided to stop by and eat something. After the meal, the turtle was still out of his sight, and he felt lazy after the meal, so he decided to take a nap. The nap turned into a long careless sleep, and he did not realize when did the turtle ran past him. 

The rabbit suddenly woke up, alarmed, and started running as fast as he could to catch up in the race. But when he reached the finish line, he saw the turtle waiting for him. His head hung in embarrassment.

Moral of the story: Slow and steady wins the race

Let's try to relate this story to the life of an investor, how we manage our investments and understand its implications on our financial health. Let's see why the rabbit, in spite of being better positioned lost to the turtle.

• The rabbit leaped very high initially, like the investors who have  money and are pumped up to make more out of it.  They do not think and start putting in their money, in order to reach the finish line earlier. You have a good start doesn't mean you'll experience same trend all throughout your investments in long term. Your strategy should have a balanced approach to meet your long term goals as per your risk profile. There should also be a differentiation between short-term and long-term goals and planning should be done accordingly of where you want to reach and when.
• Overconfidence: There is a thin line between confidence and overconfidence and once the line is crossed, it can cause only harm. There are investors, who are overconfident on their knowledge about the markets and products and often their views are biased between different asset classes. They go very aggressive in their preference of any particular asset class, often debt and equity, and then risk their money. One has to realise that both asset classes are for different time horizons and suitable as per differing risk profiles of the customers. Going overboard on any particular asset class will put your capital to risk, and this includes investments in Bank FDs which carry of risk of loosing 'real value' over time due to inflation.
• The turtle was slow but was steady at the same time; our mutual fund SIP's are based on the same theme. SIP  investments are most suitable for small investors who can regularly invest irrespective of worrying about market levels. The turtle investor will be disciplined and will invest his regular SIP amount, no matter what comes his way, he will not get carried away by a restaurant (another hot investment opportunity) or need for a nap (other personal aspirations like desire to travel, or buying a car, etc). He will meet his other aspirations only after providing for his investment commitment. While a rabbit investor gets carried away by the restaurants and the need for nap falling in his way.
• The rabbit should have been vigilant even if he wanted to take a break. He got so overwhelmed with his hunger and nap, that he forgot his ultimate goal, and when the clock struck 12, he tried his level best to meet his goal, but to his dismay, the turtle was already there. Similarly, the investor who keeps his life goals ahead and religiously follows his investment plan, will meet his goals in time, while others who lose track for other things that come their way, end up repenting. At times, there is no way the investor can make up for his losing vigil, that he can't achieve the goal, no matter how hard he tries.
• The rabbit shouldn't have overlooked the power of patience that the turtle had. The rabbit investor invests and expect instant returns, he does not realize that it is not a magic wand, rather it is a seed which is just sown and will need time to turn into a tree and reap ripe fruits. The rabbit panics and sells at lower prices when the market falls and gets excited when the market rises, and buy more at higher prices. The turtle invests and then wait patiently, he too faces highs and lows but with patience, he keeps a control over his emotions and wins the race.

The story throws light on issues that we face when we become the rabbit and how we should adopt the virtues of patience, discipline, confidence, vigilance and balance of the tortoise in order to win the financial race.

Have you ever heard of the term – Credit Score? If not, it is perhaps one most important thing you have to learn about.

What is it?

A simple definition is that a credit score is a numerical score which is calculated based on an analysis of your personal creditworthiness. It factors in your present financial situation and your past financial behaviour. The data used to calculated your credit score is procured from various financial institutions or credit bureaus who maintain such information. All your records with banks, lenders, depositories, credit card companies, etc. have a lot of data on your finances which are used in calculating the score. The agencies which calculated the credit scores are

How is it used?

Credit score is primarily used by lenders, such as banks, housing finance and credit card companies, to evaluate the potential risk posed by lending money to you and to mitigate losses due to bad debt. The credit scores are used to decide important things like

• loan eligibility or qualification

• interest rate to be levied

• limits of credit

In other words, the lenders decide on the risk you pose and the revenue that can be made from you. As India gets data rich and more and more financial transactions are captured, such scoring mechanisms are bound to be used not just by lenders but also by others like insurance, land-lords, government departments, telecom companies and so on. Don't be surprised if few years down the line, your credit score is asked along with your Kundali /horoscope for marriage! And to think of it, there is a strong reason to ask for it.

You can get your Credit Score or a detailed Credit Report from the bureaus providing same, either free or for a cost.

Who has credit scores in India?

In India, there are four credit information companies licensed by the RBI who has jurisdiction on the same. These bureaus have their own methodology to calculate the credit scores. The Credit Information Bureau (India) Limited (CIBIL) is the most popular one who has developed the so called CIBIL Credit Score. There are three other bureaus namely, Experian, Equifax and Highmark who have been given licenses by RBI to operate as Credit Information Companies in India. These

Talking about CIBIL Score, it is a three-digit number that ranges from 300 to 900, with 900 being the best score but very rare. Typically a score of about 750 and above is considered very good. Individuals with no credit history will have a no-hit or NH. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months or more of credit usage to obtain a satisfactory credit score. The higher the score, the better it is for you.

How can I improve my Credit Score:

There are many things that go into defining your credit score and there is no way to know how the bureaus calculate it. However, keeping the following things in mind will surely help you in keeping your credit score healthy:

• Income: Have a good and regular income stream (cash dealings not counted here!). Try to channelise / deposit all your incomes through your bank accounts at regular intervals, especially if your a businessman.

• Repayment: Do not let any payments get rejected due to lack of funds (the biggest spoiler!). Always make sure that your bills, especially EMIs and credit card bills are paid on time.

• Investments: Have investments made in format investment avenues (physical gold/real estate won't help!). Have investments in relatively liquid avenues like mutual funds, shares, bank deposits, etc. helps your scores.

• Debt: Do not have debt or too much of it (that's the counter weight to your assets!). It shows that you are credit hungry. Try to have less than 40% of your income going to all loan servicing. Also try not using the full limit on your credit cards. If possible, start paying off your loans, starting with the most expensive ones first.

• Debt Mix: Have a fine balance between secured and unsecured loans. Unsecured loans have slightly less weight as new lenders prefer them against already secured loans.

• Inquiries: Do not use / request credit score or report often (it means if you are upto something!). Regular inquiries or asking multiple lenders, who in turn request scores, for loan details means that you are desperate for same. Better is to research online before sharing your requirements with lenders.
   

If you have been investing in Stocks, Bonds, FD's, Real Estate, Mutual Funds, etc., so by now you must be having a sizable investment portfolio. This investment portfolio of yours, as you all know, is the key to living a peaceful financial future. And since it is such an important component of your life that it has the ability to control your future prosperity, so it must be of utmost quality and should fit well into your requirements at all times. Hence, it becomes imperative that you do a quality check of your Portfolio regularly.

Yours have some unique preferences and constraints, and the portfolio should take care of them besides generating returns. The investment portfolio must stand true to:

1. Your Risk Appetite, the risk associated with your overall Portfolio should not be more than you can digest and

2. Time Horizon as per your goals: The point of having an investment portfolio is, it should be able to provide for all your life goals, so it is important that your investments are in alignment with your goals.

The general trend of investing is random; a small FD in one bank, another one in another bank, some stocks, some mutual fund investments, a piece of land, few gold coins, a PPF investment, few SIP's, and the like. This approach results in having a haphazard array of investments. So, the first step is to recollect and write down all the investments, asset class wise. Once you have a clear view of the entire Portfolio, the next thing to do is to ensure that it adheres to the above two points. It'll be ideal to seek help from a financial advisor for the process.

Before re balancing the Portfolio to arrive at your ideal asset allocation, it's important that you do a performance check of all the investments in your Portfolio. It's important to analyze the overall portfolio performance as well as the performance of all the components that make up the Portfolio. Also, you must note that all the investment products are different, carrying different levels of risk and hence offering different returns. So, you must not just sell off an investment just because it is giving lesser returns than another. It's important to do an Apple to Apple comparison, for example if a Mutual Fund investment is to be analyzed, it must be compared against it's benchmark and with funds in the same category, and not with other funds or products within your Portfolio.

Another point to note here is, the investment must be analyzed on the basis of a relevant investment period. For example, if you are evaluating an equity investment, a one year or three year return analysis will not give you a clear picture, it can be way to high or it can be exceptionally low. You must consider a period of at least more than five years while evaluating equity.

Does your Portfolio contain investments which you don't understand? Sometimes, investors tend to fall for the traps laid by investment agents, and they end up accumulating stuff which firstly, they don't understand and secondly, they don't need. So, if you are one such victim, it's time to get rid of them.

Does your Portfolio contain a traditional Endowment plan as well as a modern term plan? If Yes, you must do away with the traditional endowment plan, because of low sum assured, so it doesn't fulfill it's primary purpose of providing protection, and also which is being taken care of by the term plan; and secondly because of the meager returns it offers.

Is your Portfolio Over diversified? Too many investments causes clutter. You don't have to buy every new product that's launched in the market. Over diversification can be as bad as Under diversification. So, if your Portfolio is loaded with products, there is need to simplify it.

The investments under each asset class must be linked to a goal and must match with the time left for the goal to arrive. You must note that your asset allocation is not an isolated activity, it is also dependent upon your goals. The distance to your goals and the amount required also influences your risk appetite and your portfolio composition.

Your financial advisor will be of immense help to you in analysing, reshuffling and cleaning up your Portfolio, so that it conforms to your Risk Profile, your Goals and your Investment Horizon. It is very important to have a professional guiding you in your overall financial planning process, who will ensure that you take informed investing decisions, who will take care that your Portfolio doesn't lose track. So sit with your advisor and quality check your Portfolio. Also, Portfolio cleaning is not a one time activity, so do not miss the regular portfolio reviews with the advisor. It's ideal to check your Portfolio at least once a year, or on the happening of certain events like selling a property from the Portfolio, marriage, divorce, child birth, etc. It's like checking the progress of your dreams accomplishment.

Asset Class is a often used word in finance, especially investment & portfolio management. We also used the term many times in our articles. In this article a take a academic look at the various asset classes.

Why know about different asset classes?
Knowledge and understanding about asset classes is a very basic for any person thinks of self as an investor. Though it is not required that one be expert with every asset class, the bare minimum understanding of the nature of main asset classes, the risk profile, returns potential and the way of investing into such asset classes is a humble expectation. In brief, we can put the following reasons for knowing about asset classes:

• Increased choices for informed decision making
• Better investment management through asset allocation & diversification
• Identifying emerging opportunities & risks for investing
• Being rational, unbiased and confident in investment decisions

How do asset classes differ?
Each asset class is different and there are many points of difference against other asset classes. These differences ultimately impact the investment objectives and performance. The asset classes may differ upon the following things...

• Nature and characteristics
• Correlation with other asset classes
• Risk and Returns potential / trade-off
• Ideal investment horizon
• Behaviour w.r.t. markets, interest rates, economic environment, etc.
• Rules, regulations and taxation

Definition and Types of asset classes:
An 'Asset Class' can be defined as a group of securities or investments that display similar characteristics or behave in similar fashion in markets or economic variables and are subject to similar rules & regulations.

There are broadly three basic asset classes considered by most investment experts: (i) Equity securities (ii) Fixed Income or Debt securities and (iii) Cash equivalents. In addition to this, (iv) Real Estate and (v) Commodities are also considered by many as important asset classes given their characteristics and penetration among investors.

The asset classes can be further broken down through ways, but such segregations are generally mixed together whenever we talk of asset classes at a broader level. For example, Equity can be further broken down as large-cap, mid-cap & small-cap but for the purpose of asset class discussions, we categories them all into equities, even though their risk-return behaviour may slightly differ from each other. Breakups can be effectively used for determining diversification within an asset class. But irrespective of any asset class line-up, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.

Equity:
Our readers must be very familiar with Equity asset class by now. Most would also know that over long term equity as an asset class has outperformed other asset classes in India as well as in more developed economies. Equity basically enables efficient movement of funds from people having excess to businesses that need it to fund growth and business operations. The businesses in turn provide employment, goods & services to public and tax revenues to government and try to make the most productive use of the capital. Equity is a risky asset class and investments should be made for long term. The returns from such investments are in form of capital gains by price appreciation and/or dividend payments by companies.

In India, the equities are largely held directly through stock exchange or indirectly through mutual fund equity schemes. Exposure to equity can also be made through Exchange Traded Funds (ETFs) and Portfolio Management Schemes (PMS) and indirectly through pension schemes / plans that invest in equities. Insurance products, especially Unit Linked Plans (ULIPs) is an another route well known route. Equity can also be held in form of stakes or Private Equity in businesses. This option, however, is limited super HNI and corporate investors.

Debt:
Debt is an another asset class which your would be very familiar with. Some of the popular avenues of debt investments are through Fixed Deposits of banks & corporates and bonds issued by governments, RBI and the likes. Small Saving schemes and pension plans by government is an another major avenue of investing. Mutual funds schemes are lately becoming popular with retail investors too. The mutual funds offer a wide variety of products to suit every need and risk profile of the customer. It is a relatively less risky asset class and returns are generally in form of interest payments and/or capital gains due to impact of interest rates changes over time.

Commodities:
Commodities may be treated as a distinct asset class since their nature and behaviour differs from the other asset classes. Indians have been traditional investors in 'gold' as a commodity. Other commodities are now finding a favour with investors, albeit slowly. Precious metals like Gold & silver remain the biggest avenue for investment and awareness & exposure to other commodities is very low. The impressive performance of these metals over past few years have made them as asset class hard to be ignored by investors.

The commodity prices tend to follow the cyclical pattern of underlying commodities which is why it is important to understand the demand-supply factors. Needless to say, this is not an asset class for the less informed or the faint hearted, especially for agro-commodities & base metals. Investment is generally for short to medium term and the idea is to profit from price movements or hedge against actual exposure. As an asset class, commodities have been observed to have low correlation with the other asset classes and hence offer excellent potential for portfolio diversification. Investments into Gold specially has also become more convenient & practical for investors with the launch of Gold ETFs and mutual fund schemes.

Real Estate:
Real estate is the original idea of creating assets before the other asset classes become popular among investors. Real estate, especially residential / commercial units, unlike other asset classes, except gold, gives the owners a sense of emotional satisfaction and confidence. Holding physical property has also its own share of social acknowledgment of your financial standing. Land is also treated more than an asset in the largely agrarian economy of India.

From an investor's perspective, the investment in physical real estate has its own share of challenges w.r.t. clear titles, transparency, transaction costs, etc. Emergence of new avenues for investments has, to some extend, made it feasible to get exposure to this asset class with less risks. The returns in this asset class is in form of rental/ lease payments and price appreciation. Real estate are the least liquid of all the asset classes and investment horizon is generally long-term to very long term in nature.

Cash:
As an asset class, cash and cash equivalents is unlike any other asset class. The purpose of holding cash is either for transaction / payment reason or as a precaution for any eventuality or as a buffer for taking advantage of opportunities in other asset classes/ products. Cash is the least productive of all asset classes and delivers little or no returns and over time looses out its real value as well. Cash equivalent holdings are dictated by convenience, comfort and cash habits of people. As an investor, one should try to minimise cash equivalent holdings to an optimum level that strictly meets your needs. Mutual fund liquid funds is considered as the ideal avenue for putting aside money for short durations, giving advantages of superior post-tax returns, high liquidity, very low costs & convenience.

Other asset classes:
Apart of the above major asset classes discussed, there are also some more asset classes considered by few investment experts. You may come across asset classes like currency, derivatives and collectibles. Currency, as an asset class is distinct in nature and it derives its existence because of the exchange rate fluctuations between countries. Currency is something of great interest to governments, banks, multinational corporates having business incomes arising in different countries, and even to individuals where source of income and consumption are in separate countries. Derivatives is an asset class that 'derives' its value from the actual underlying asset class. It is more of an hedging and trading tool and fraught with very high risks, something which is suited only for the experts. Collectibles is an emerging asset class where investments are made in art, antiques & other collectibles. This asset class is now finding more favour with HNI investors who are looking for some diversification & spice in their portfolio.

Using Asset Classes:
Understanding of the asset classes leads us to the question - Whats' next?. The usage of different asset classes are basically two fold. First, the understanding is useful for purpose of diversification to optimise risk-return trade-off. This is because different asset classes perform differently in different markets and also differently from each other. Diversification only works when you combine assets that have opposite or low correlation with each other. The second idea is to decide and follow the 'asset allocation' strategy. The asset allocation strategy has been cited by investment managers & experts as the biggest deciding factor for long term wealth creation. Financial advisors have propagated asset allocation strategies of tactical, dynamic and strategic in nature to their investors keeping in mind their risk profile.

In brief:
As markets grow and become mature, there would increasingly be arrivals of new asset classes or product options in existing asset classes. As of today, there already exists a wide variety of asset classes and product options within them, something which wasn't available a decade back. The increasing choices of asset classes and financial products brings complexity, confusion & challenges to any investor. An informed and wise investor would always try and understand & appreciating the nature and nuances of different asset classes. The awareness and comfort level can then be used for designing portfolios based on age old principles of asset allocation and diversification.

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