Equity, debt and allocation: Over the past 10 years, equity returns have only kept pace with the earnings growth of companies.

With industrial growth on the upswing, the outlook for expected returns from equity is promising. It could range between 12 per cent and 18 per cent per annum over the next few years.

If investors step up allocation to equity, the returns could be substantially higher. Investors do not hold that much equity in their portfolio and annually invest less than five per cent in equities. A bare minimum of 15 per cent allocation to equity may be needed to reduce risks. If this happens stock prices would soar.

Returns from debt looked abysmally low at the start of 2004. Now, at about five per cent post-tax, but before adjusting for inflation, returns from debt do not look that bad. Still, the prudent course would be to stick to small savings schemes. Short-term money can be parked in liquid and short-term debt schemes.

Dealing with home loan: Interest rates have risen and many home loan borrowers have been surprised to find that even fixed rates have been jacked up. It appears that there are two types of fixed rate loans — with reset and without. Those without reset are applicable for the tenure of the loan and will not be changed. Fixed rate loans with reset options are subject to change.

Many borrowers were not aware that they have got themselves into fixed rate loans with a reset option, and housing finance companies appear to have got away with misleading the borrowers. Borrowers can only accuse housing finance companies of sharp practices and cannot do anything more.

Fortunately, there will be no impact on cash flows as EMIs will mostly remain unchanged and only the tenure of the loan will be increased.

If, however, you could manage the extra cash burden, it would be prudent to opt for higher EMIs. It makes little sense to extend loan commitments to beyond 15 years. Beyond 15 years, the advantage in terms of lower monthly payments is quite low.

ULIPs: A less optimal solution: Investors have been piling on to the unit-linked insurance plan bandwagon in a big way. ULIPs are, however, only for those who are highly indisciplined or do not know the ABCs of investing. Mr Sashi Krishnan, CEO of Cholamandalam Mutual Fund, says that investors can create their own ULIPs.

They only have to buy term assurance for themselves and invest the rest in mutual funds. They are highly likely to end with significantly better returns. It would also keep the investment plan for 2005 simple: Term assurance, equity mutual funds, small savings, properly managed home loan, loads of discipline and a dash of luck.

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