Go for a mix of large cap and flexi-cap equity funds if your investment horizon is five years
l I have never invested in mutual funds but now want to invest Rs 5,000 a month for at least five years. How should I select a fund and should I look at one-year returns?
– Rohit Kumar
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. Longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. With investment horizon of at least five years, 40-45% of your investment portfolio could be allocated to equity, 50-55% to debt and 5% to gold. If you hold other debt investments, in the form of PF, PPF, etc., fresh investments could be made into two to three equity funds through systematic investment plans.
Given the investment horizon, it would be advisable to select a mix of large cap and flexi-cap equity funds. Since these funds typically invest in either large cap stocks only or a mix of large, mid and small cap stocks (flexi-cap funds), their volatility tends to be lower relative to small and mid cap funds. When selecting funds it is advisable to consider fund performance over at least the previous 3-5 years.
This, along with studying calendar wise performance vis-à-vis benchmark indices and peer group would indicate its consistency across time frames and market cycles. Additionally, you could consider the fund’s asset under management (AUM should be greater than Rs 1,000 crore) and period of existence (longer the better). This information along with fund research ratings is provided by independent research firms online. Review your investments every 12-18 months to ensure performance is in line with expectations, market benchmarks & peer group. As you approach the end of your investment horizon, gradually reduce allocation to equity in your portfolio and bring it to zero. The proceeds can be invested in a liquid or short term debt fund till they are required.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org