Are You Allocating Your Investments Wisely As an SME?

Are You Allocating Your Investments Wisely As an SME?

Finance & Accounting

Anirudh Gupta

Anirudh Gupta

47 week ago — 4 min read

An entrepreneurial life is an adventurous life. It comes with its ups and downs, primarily led by uncertainty of cash flow. Therefore, the investments done in personal capacity need to factor in that. Also, the nature of business should reflect in the investing decision. Most people do not follow that logic and go by what they have heard.

 

There are two types of businesses. One is a month-on-month cash flow business which we also call a ‘horse business’ with stable demand. Second is a seasonal or a business with fluctuating demand and long cash to cash cycles. Both situations require different types of thinking. Sometimes entrepreneurs would have sets of business which have different characteristics and for that customisation would be necessary.

 

Let us take up the horse business situation. Assuming cash flow to the business and the entrepreneur is steady then the entrepreneur is in a position to consider more risks on a calculated stance. The portfolio can be tilted towards more longer-term risk with some provision for fixed income instruments like debt funds and fixed deposits.

 

The portfolio looks like this:

Equity – 25%

Equity oriented opportunities – 40%

Debt funds/fixed deposits – 15%

Alternates – 20 %

 

What are the Alternates?

Any asset class which is not mainstream like gold, equity and property is alternate. They provide returns not linked to overall market performance when markets are down.

 

What is a portfolio under Camel Strategy?

Camel Strategy is a liquidity driven strategy wherein like a camel the business keeps cash flow so that it does not face liquidity issues.

 

Debt – 50%

Equity oriented opportunities – 30%

Equity – 10%

Alternates – 10%

 

This set of strategies is based upon cashflows of the underlying situation and hence it is effective.

 

Wont the returns be lower in a camel strategy?

Yes. However, it is a sustainable strategy. It goes into the heart of asset allocation as well as capital allocation for the business which makes the roadblocks seem to go like the breeze. That said some tinkering may be done should the business improve from a camel business to a horse business.

 

One of our clients runs a successful services business which is a horse business. He takes more calculated risks with our highlighting this point. Similarly, an entrepreneur who runs a medium enterprise, toned down his risk which he reluctantly agreed that he needs to reduce it. Luck is when preparation meets opportunity. When one is self-aware the odds increase in one’s favour. The journey starts within. Like you seize all opportunities related to your business, Carpe Diem in investing with the right understanding.

 

Also read: The secret to healthy finances? Setting business & personal goals

 

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Image source: Freepik

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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