When I review investment portfolios, I often see two very different kinds of investors. Some have most of their money in fixed deposits, savings accounts and other very safe investments. Others have gone almost entirely the other way, with most of their wealth in equity mutual funds, stocks or other growth-oriented investments.
These approaches look completely different, but they can create the same problem: almost all the money is travelling in one gear. That can make the financial journey unnecessarily difficult and, at times, risky.
About the author: Mahesh Kumar K is a SEBI-registered Investment Adviser and Principal Adviser at ClearPath Wealth. He is a member of Fee-only India, a group of fixed-fee-only SEBI RIAs.
Different roads need different gears
Think about a long road journey. There are stretches where you need control, stretches where you can move comfortably, and open roads where you can travel faster. You don’t stay in the lowest gear for the whole journey, but you don’t stay in the highest gear everywhere either. The right gear depends on the road ahead.
Money works in much the same way. Some may be needed soon, some a few years later, and some may not be needed for five years or more. For retirees, the long-term portion may have an even longer runway. The exact number matters less than the principle: money needed at different times should not all travel in the same investment gear.
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The lower gear: when safety and access matter most
Money you may need soon has one primary job: it should be available when you need it. Here, liquidity and stability matter more than squeezing out the highest possible return. Savings accounts, fixed deposits or other suitable low-volatility investments can play this role depending on the purpose.
It can be tempting to say, “Equity should earn more.” Perhaps. If your child’s college fee is due next year, the market does not know that. If you need money for a house purchase six months from now, equity markets will not become less volatile because your payment date is approaching. For this part of the portfolio, certainty can be more valuable than return.
But staying in the lower gear forever creates another risk. Money meant for goals several years away may not grow enough if it remains permanently in very low-return investments. Inflation keeps increasing the cost of the destination while the portfolio moves slowly toward it. The ride may feel smooth, but you may still fall short.
The higher gear: when time allows growth
Now consider money that may not be needed for five years or more. Here, the job is different: there is more time to absorb market ups and downs in pursuit of stronger long-term growth.
This is where equity and other suitable growth assets can play an important role. But one condition matters enormously: the money must genuinely have a long runway.
High gear works because the road is long. It does not mean high gear is always better.
The problem appears when almost everything is in high gear. If an important requirement arrives during a sharp market fall, the investor may have to sell equity after it has fallen.
The danger is not simply that equity can fall. The danger is needing to sell equity when it has fallen.
Markets recover on their own timetable; our financial goals follow ours. When those timetables collide, a portfolio that looked efficient during good markets can suddenly become fragile.
I discussed a related idea in my earlier Freefincal article, “Should You Invest in an International Fund? Try This Test First”. There too, the question was whether an investment actually had a role in the portfolio. The same principle applies here: first understand when the money may be needed, then choose the investment.
The missing middle gear
Between money required soon and money that can remain invested for the longer term lies a large part of real financial life. This is where a middle gear becomes useful: a part of the portfolio designed to balance stability with reasonable growth. Investors often behave as if money has only two choices: very safe or very aggressive. Financial life is rarely that binary.
The middle layer also performs another important job. If money needed over the next few years is positioned appropriately, you are less likely to disturb long-term growth investments during a bad market. In that sense, the safer parts of the portfolio do more than protect themselves; they can protect the growth portfolio from being sold at the wrong time.
Your portfolio should not ask one investment to do three different jobs
This is the larger idea: some money needs to remain liquid and stable. Some needs a balance between stability and growth. Some needs to compound for the longer term.
No single investment can optimise all three jobs at the same time.
That is why “Which investment gives the highest return?” should not be the only question. Equally important is whether the investment is suitable for when the money will actually be needed.
One final thought
A good financial journey does not require us to predict every difficult road ahead. It requires a portfolio that can handle different roads when they arrive.
The goal is not to stay permanently safe, nor is it to remain permanently aggressive. The goal is to have the right money in the right gear for the road ahead.
You would not drive an entire road journey in one gear. Your portfolio should also have different gears for different parts of your financial journey.
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About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
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