1. Investing in mutual funds: Higher equity allocation for longer investment horizon crucial

Investing in mutual funds: Higher equity allocation for longer investment horizon crucial

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.

By: | Updated: June 27, 2017 4:58 AM
Investing in mutual funds, mutual funds, mutual fund investment, investment horizon, PF, PPF, fresh investments, Systematic Investment Plans A suitable asset allocation is typically based on one’s investment horizon and risk appetite.

I am 22 year old. I am planning to invest in mutual fund about Rs 2,500 per month via SIP for time horizon of 25 years. Please advise me how should I go about it?
—Ramesh 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 typically 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 of 25 years, 60% to 70% of your investment portfolio could be allocated to equity, 25% to 35% 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 into one or two equity funds through monthly Systematic Investment Plans (SIPs).

Given the investment horizon, it would be advisable to select one large cap and one small/mid-cap equity fund. Alternatively, you could consider Equity Linked Savings Schemes (ELSS) which typically invest in a mix of large, mid and small cap stocks and are eligible for tax savings under Section 80C of I-T Act. These funds carry a lock-in of three years. When selecting funds it is advisable to consider fund performance over atleast the previous 3 years to 5 years.

This along with studying calendar wise performance vis-à-vis benchmark indices (like Sensex, Nifty, etc.) 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 500 crore) and period of existence (longer the better). This information along with fund research notes/ratings are provided by various independent research firms online. You should review your investments in these funds every 18 to 24 months to ensure that the performance is in line with your expectations and market benchmarks.

You might also want to see this:

How do I buy some tax-free bonds from the secondary markets?
—Kunal Gopal
Tax-free bonds are listed on the debt segment of various exchanges such as NSE and can be traded there, although the liquidity might vary from bond to bond. An important feature of tax-free bonds is the differential coupon applicable for the institutional and retail options of the same bond, which might result in different prices and yields available on those bonds.

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

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