Year 2003 draws to a close on a rather odd note. While equity markets have touched record highs, debt markets are struggling to find momentum.

The temptations for investing in equity markets and disillusionment with debt markets have rarely been stronger.

In contrasting times like these, let's discuss what investors should do in the Year 2004.

1. Investments

• If you are between 25-35 years of age: When you are young, have time on your side and can assume higher risk, theoretically equities are the place to be.

Studies have proven that over the longer term (about 20 years) equities have managed to out perform comparable asset classes like gold, bonds, property and fixed deposits.

Also equities are best equipped to cope with inflation. Having established the prowess of equities, let's not ignore the fact that equity markets are overheated at the moment and how long the rally will last is anyone's guess.

Around 35 per cent-45 per cent of the total investment should be reserved for diversified equity schemes.

Despite the risk involved, diversified equity schemes make sense because in a market like India there is a high probability that 'good' fund managers will out perform benchmark indices like the Sensex and the Nifty.

This is underscored by several schemes which have outperformed the markets by a huge margin over five- to ten-year periods.

Investors should opt for a portfolio wherein around 35 per cent-45 per cent of the investments are made in hybrid instruments like balanced funds.

Balanced funds (which have an approximate 60 per cent cap on equities) should be exhaustively utilised. The balance amount should be reserved for income funds.

This amount can be spread over bond funds, G-sec funds and floating rate funds.

Floating rate funds have assumed more significance with the recent interest volatility and must find a place in every investor's portfolio for their utility in curtailing volatility.

• If you are between 35-45 years of age: In this age bracket your risk appetite is likely to be moderate; consequently your exposure to equities should be lower as well.

Hybrid schemes (balanced funds and MIPs) which take varying degrees of equity exposure should constitute a chunk of the portfolio.

Of the total assets, nearly 50 per cent-60 per cent should be invested in this category. Equity funds (including aggressively managed ones) powered by their ability to provide capital appreciation should form 20 per cent-30 per cent of the portfolio. Income funds should account for the balance 15 per cent-25 per cent.

Investors should opt for diversified bond funds, with the balance in G-sec funds and floating rate funds.

• If you are above 45 years of age: At this stage you are possibly making plans for retirement. You are averse to volatility and stable income flows are what matter the most.

Investments should be pre-dominantly in low risk hybrid schemes like MIPs (with a maximum exposure of 15% to equity) and income funds.

The MIPs will help in boosting overall portfolio returns without increasing the risk proportionately (the fund manager of a MIP always has an option to cut his exposure to equities in case the environment was to turn for the worse).

The debt portion of your portfolio should be largely allocated to bond funds and floating rate schemes.

A higher allocation in floating rate funds would imply that the investor moves with the market and is largely insulated from turbulent patches.

Investments in G-sec funds should be lower, since they tend to be volatile in times of interest rate tumult.

Exposure to equity funds should be limited to a maximum 5 per cent-15 per cent. Conservatively managed schemes with well diversified portfolios should be chosen.

Investments in monthly income plans (MIPs) should be in the range of 40 per cent-50 per cent of the portfolio, while balanced funds should account for 10 per cent-20 per cent.

The portfolio's equity component (i.e. diversified equity schemes and equity portion of the MIPs) will give a boost to the savings while the debt component will provide the much-needed stability.

While the percentages mentioned above are largely indicative in nature, the vital aspect to be maintained across various age brackets is diversification.

It makes a lot of sense to be diversified across various categories. The age old adage "Don't put all your eggs in the same basket" still holds good.

Secondly invest regularly, i.e. investing a chunk of money at one go, may not fetch the same kind of returns that you will get by investing the same amount in smaller portions over a period of time.

Disciplined investing in tune with your profile and objective is the way to achieve your financial goals.

2. Insurance

The attractiveness of debt markets has come down sharply post the monetary policy.

The exuberance seen in the last two years is clearly a thing of the past and this is likely to adversely impact the bonuses declared by insurance companies.

In this scenario it is important that individuals keep in mind that the primary objective of insurance is to protect against an eventuality. Returns are a distant secondary objective.

So if you are only looking for a healthy return from your life insurance policy, you are probably better off by investing in mutual funds and other avenues that are available today.

But taking a long tenure pure life cover (term insurance) can be a good option especially when one considers, first, the benefit of providing a lump sum to dependents  in case of an eventuality and, second, the low cost of taking such a cover.

Investors can stop relying on plain vanilla policies and should instead opt for insurance policies after considering the end purpose.

Child plans, single premium policies, loan term cover assurance etc. are available each serving a different purpose. Individuals in their mid-twenties with age on their side should look at pension plans.

Similarly for investors in thirties who have dependents to provide for, could consider long tenure term plans. Endowment plans will be the right fit for someone in the early forties.

3. Home loans

Banking on incessant and sharp rate cuts as experienced in 2003 may not be the right strategy. As the interest rate scenario grows increasingly uncertain, consumers should consider opting for fixed rate loans.

While fixed rate loans might curtail the gains of falling interest rates (if any), they will also shield the borrower from rising interest rates.

Loan seekers would do well by reading the fine print on their loan agreements, deciding the period over which they intend to repay the loan before opting for a loan. In other words its time to start making well thought and informed choices.

2004 promises to be an exciting year, full of opportunities and pitfalls as well.

The need to make well-thought and researched decisions has never been greater.

While making investment decisions based on hear say and 'tips' is likely to spell disaster, smart choices aided by professional help will be the route to financial success.

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