1. Investing in mutual funds: Here is the ideal combo for maximum benefit for you

Investing in mutual funds: Here is the ideal combo for maximum benefit for you

The asset allocation or the mix of various assets including equity, debt, gold, etc., held in a portfolio is considered one of the key determinants of its performance. A suitable asset allocation is based on one’s investment horizon and risk appetite.

By: | Published: November 6, 2017 3:59 AM
mutual fund investment, how to invest in mutual funds, why invest in mutual funds, faqs about mutual funds Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

I am 25 years old. I want to start SIP of Rs 25,000 per month for 5-6 years. Should I invest in mutual funds or ELSS?
– Chintan Goradia
The asset allocation or the mix of various assets including equity, debt, gold, etc., held in a portfolio is considered one of the key determinants of its performance. A suitable asset allocation is based on one’s investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. Considering your investment horizon, 40-45% of your investment could be allocated to equity, 50-55% to debt and around 5% to gold. In case you hold other debt investments, in the form of PF, PPF, etc., fresh investments could be made in one or two equity funds through monthly SIPs. Given the investment horizon, it would be advisable to select one large cap and one small/mid-cap equity fund or diversified equity funds that invest in large, mid and small cap stocks in varying proportions based on the fund manager’s views.
You could also start an SIP in an ELSS fund which provides tax benefits under Section 80C. Investments in ELSS funds including SIPs carry a lock-in of three years. When selecting funds, it is advisable to consider fund performance over at least the previous three years to five years. This, along with studying calendar-wise performance vis-à-vis benchmark indices (like Sensex, Nifty, etc.) and peer group, would indicate consistency across time frames and market cycles. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore) and period of existence (longer the better). This information along with fund research ratings by independent research firms can help one select suitable funds. You should review your investments every 18-24 months.

How does systematic transfer plan work and is it beneficial in the long run?
—Gopal Deshmukh
Systematic Transfer Plan (or STP) allows an investor to transfer investments from one fund to another (of the same AMC) at a pre-determined frequency, like monthly, quarterly, etc. In case one has a lump sum amount and wants to invest it in a staggered manner, the amount can be invested in a liquid or ultra short term debt fund and an STP can be initiated to the desired fund (equity, balanced, debt, etc). Instead of parking the money in a bank savings account with a low interest rate and investing via SIP into the desired fund/s, the investment in an ultra short term or liquid fund can potentially earn a higher return.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India).
Send your queries to fepersonalfinance@expressindia.com

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