Is real-estate a large part of your portfolio - how to value income-generating investments?
This article provides thumb-rules for adding the value of income-generating investments for your long-term portfolio based on how much returns they give.
Is real-estate a large part of your portfolio - how to value income-generating investments?
Posted on 06 Nov 2024
Author: Sayan Sircar
Tags: 
Portfolio Construction
7 mins read
Portfolio Construction
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This article provides thumb-rules for adding the value of income-generating investments for your long-term portfolio based on how much returns they give.
📚 Topics covered:
- How do you correctly value income-generating assets for your portfolio?
- How do you add multiple income streams to your retirement portfolio?
- What is total return and why is it important for understanding income-generating assets?
- How do you add high-price appreciation and volatile assets to your portfolio?
- How to add low-price appreciation and stable assets to your portfolio?
- How do you add income-generating assets like bonds and FDs to your portfolio?
- How do you add NPS to your portfolio?
How do you correctly value income-generating assets for your portfolio?
This article is in response to a query from a reader:
I have my second flat which gives a rent value of 10K and the worth of the property is currently 50Lacs. So how to handle this property for our goal planning sheet for calculations?
There can be multiple variations of this question:
- portfolio has ₹1 crore worth of dividend-paying stocks that gave ₹3 lakh worth of dividends last year
- portfolio has ₹50 lakh worth of government bonds that gave ₹3.5 lakh in coupon payments last year
- portfolio has ₹2 crores in NPS that, when it matures next year, will be used to purchase an annuity (current annuity rate for 60-year-olds is 6.5%)
- portfolio has ₹5 crores in FD in SBI at 7% with interest payout every 6 months
How do you add multiple income streams to your retirement portfolio?
The Arthgyaan goal-based investing tool supports incomes from rent, interest, pension, royalty, commission, or any other source, with or without an inflation adjustment, to your portfolio.
Here’s a list of income sources that you can enter in the sheet:
- FD interest for FDs you already have
- Dividend income from stocks you already own
- A part-time job that you are planning to take post-retirement (BaristaFIRE cases)
- Royalties from books that you have already written (if you are a professional author, you can include royalties from future books as well)
- Pension income from annuities that you have already taken
- Insurance payouts from whole life or endowment plans whose future payouts are known
- Rent from property you already own
- Interest from bonds, government or corporate or gold (SGB), from bonds you already have
- Consultancy roles you plan to take up in the future
- Professional income (for doctors, lawyers, CA etc)
- Commissions for insurance agents, mutual fund distributors etc.
You can read more on using this tool here: How can you add multiple income streams to your portfolio for retirement?
The asset and portfolio tracking features of the sheet are free for all users.
We will use this sheet to capture the rental income (in this example) and then adjust the assets of the investor for the value of the house.
But before that, we need to understand the concept of total return of any asset.
What is total return and why is it important for understanding income-generating assets?
Total return of an asset = Regular Income + Price Increase
Total return of a house = Rent + Price Appreciation
Total return of a stock = Dividends + Price Appreciation
etc
The above concept holds for every asset except gold (which does not give interest) and stocks of companies that do not give dividends. In such cases, you can only hope to get a return from your investment if you sell it at a higher price in the future.
Therefore, when adding income-generating assets to our portfolio, we will add the income part to the “income section” tab and adjust for the price appreciation in the “assets” tab. We need to do this in such a way that there is no double counting.
How do you add high-price appreciation and volatile assets to your portfolio?
A good example of this category of assets is stocks that may or may not give dividends. There are two ways to handle this:
- if you are already retired and dividends are considered as income: add the income stream from dividends under income assets and do not add the market value of the stocks to the portfolio
- if you are not retired and dividends are reinvested: do not add the income stream from dividends under income assets but instead add the market value of the stocks to the portfolio
A caveat here is that there will be a fluctuation in the dividend income stream due to market movements of the stocks and some retirees might find that difficult to manage. In such a case, the better option will be to add the stock portfolio value in the assets tab, nothing from dividends in the income tab and manage the movements in the stock portfolio (and associated dividends via rebalancing)
How to add low-price appreciation and stable assets to your portfolio?
Here the best example is real estate beyond the primary residence. We will obviously add the current rental income to the income stream. The question arises about the market value of the house.
We believe that the market value of the house should be added to the portfolio assets tab if:
- the house is not expected to appreciate faster than the portfolio-level debt return assumption (3-5%)
- you will sell the house in its entirety if the asset allocation requires it
In such a case, you can enter the house as a 100% debt asset.
How do you add income-generating assets like bonds and FDs to your portfolio?
For both bonds and FDs, there will be:
- either coupons or interest paid out every few months to a year
- or nothing to be received until maturity
In both cases, there will be an amount to be received on maturity which must be added as a lump sum income under income sources like this:
- Start year: This is the year when the investment matures
- End Year: Same as start year
- Income Hike: 0%
- Starting amount: This is the maturity amount
The interest/coupon income should be added to the income section in the usual way.
How do you add NPS to your portfolio?
NPS, and by extension UPS, is an interesting case because before you withdraw from it, the portfolio behaves like a hybrid mutual fund with both equity and debt allocation. Once you reach 60 (or earlier/later), you must allocate a large portion to purchase an annuity and the rest is given to you.
NPS categorisation before withdrawal
You can simply add the NPS market value to the assets tab and set the equity/debt allocation as per the current NPS fund portfolio you have invested in.
NPS categorisation after withdrawal
Once you retire, and the pension starts, you need to remove the part that went into the annuity from the portfolio and add the income stream to the income source section.
Related Articles
- How can you add multiple income streams to your portfolio for retirement?
- How to plan for retirement/FIRE using dividend income?
- How to Track Your NPS Portfolio for Free with the Arthgyaan Goal-Based Investing Tool?
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