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Risks and Returns

I am a cautious investor and thus want to ensure that under any market condition, I should be able to make 15-20 per cent of annual returns on my investments. Please suggest a portfolio and asset allocation.

I am a 27-year-old IT professional and would like to invest in mutual funds, stocks and fixed-income investments. I am a cautious investor and thus want to ensure that under any market condition, I should be able to make 15-20 per cent of annual returns on my investments (excluding fixed investments). Please suggest a portfolio and asset allocation.
A. Agarwal

First of all let's get risk and returns in perspective. The pursuit of higher returns means taking higher risks. If you are cautious then you have to settle for lower returns. This is a reality and ignoring this would be at your own peril. The 15-20 per cent annual return that you desire would put you in the highest risk-highest return category. This is the sort of returns that can be expected from a pure equity portfolio.

Today, bond funds are expected to yield around 5.5-6.5 per cent returns. Most post office instruments, which offer a return of around 8 per cent come with a lock-in period of five years. Government securities, which are risk-free, currently yield around 5 per cent for a 10-year period. On a sustainable basis, the kind of returns you are looking for cannot be generated out of low-risk investments.

On the other hand being cautious should not mean that you do not look for higher returns. You can target higher returns in a cautious manner, by being well prepared and keeping in mind that high returns entail higher risks. These risks can be reduced by doing a number of things like having an asset allocation, building a diversified portfolio and taking a long-term view. From time to time, you will also have to rebalance this portfolio. For detailed information about this process and the risks involved, please read 'Making Friends With the Market' in Mutual Fund Insight, 15 March-14 April, 2004.

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