How much of my assets should I invest? As financial advisors, this is one of the most common questions we receive. Our response: instead think of how much of your assets you should not be investing and keeping aside as emergency funds. You can and should go ahead and invest everything in excess of this. The aim is to beat inflation and at the same time, grow your wealth. This strategy enables maximum utilization of your funds and ensures that your money is working hard enough for you. All you need to do is to make sure that you have sufficient liquidity with your investments of choice and they match your risk tolerance.
However, if you have reservations about this approach to investment, fret not! The investment to total assets ratio metric has been formulated to help you ascertain the minimum amount you should be investing relative to your assets. Essentially, the metric establishes a baseline for you to ensure good financial health.
Investment to total assets ratio
Mathematically speaking, investment to total assets ratio is your invested assets (such as shares, mutual funds, property investments, etc.) divided by your total assets. It indicates the percentage of your assets that are invested to beat inflation and work towards your financial goals.
Investment to total assets ratio = (invested assets / total assets) x 100
Let’s look at Raj, a 35-year old IT professional who started investing early on in his career. Here’s where his assets stand today –
- Mutual funds: Rs 50,00,000
- Stocks and bonds: Rs 20,00,000
- Savings account: Rs 8,00,000
- Fixed deposit: Rs 12,00,000
Total Assets = Rs 90,00,000
Total Investments = Rs 70,00,00
Investment to total assets ratio = (70,00,000 / 90,00,000) x 100 = 77.8%
How much should the Investment to Total Assets ratio be?
As a rule of thumb, the ratio should be at least 50% or above. A value of 50% is considered to be the floor to ensure that the depreciation from the portion of your assets that are not invested is easily offset by the returns generated by the other half that is invested.
Anything lower than a 50% ratio would mean that you might not be able to offset inflation and in effect, depreciate your assets over time. On the other hand, a 50% ratio would get you to comfortably offset inflation but not really gain anything on top of it. In order to grow your wealth, you want to ensure that your investment to total assets ratio is above 50%.
What is an invested asset and more importantly, what is not?
It is important to remember that anything that provides an average return rate which is below the inflation rate is not an invested asset, irrespective of how considerable the returns appear to be. A common example of this is a fixed deposit which is often mistaken as an investment vehicle for its seemingly decent returns, however provides interest rates which are generally lower than inflation. While this is not an investment, it is a good vehicle to keep emergency funds in.
Building your emergency funds takes precedence over investments. But the mantra is once you’ve secured these funds, go ahead and invest everything towards your goals. The investment to total assets ratio is a useful metric for those of us who might have personal reservations about this approach. It tells you what percentage of your assets are working hard towards your future.
Make sure you keep yourself above a 50% investment to total assets ratio to ensure your assets do not depreciate over time. The higher the value, the more optimum the utilisation of your assets and the better positioned you are to grow your wealth and meet your financial goals.