‘Investors should participate in equity with realistic expectation’

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Rahul Jain of FE investor spoke with Srividhya Rajesh, portfolio manager, Sundaram BNP Paribas Asset Management, on building mutual fund portfolios. Excerpts:

How should one structure a mutual fund portfolio considering, the different types of categories available in equity and debt in case of both downside and upside trend?

Every investor must have a spread between equity and fixed-income investments. The proportion will depend on age, wealth, earnings, risk taking ability, time frame for attaining financial goals, and risk preferences. Today, even in the 50+ or 60+ age category, an allocation to equity is desirable, given the rising level of life expectancy. For the equity component, investors should have an allocation of at least 50%-60% to large-cap stocks with the share edging higher as years roll by. Young investors should have a sizeable allocation to mid-cap stocks. A 15-20% allocation to carefully identified thematic ideas may help boost overall portfolio returns. For the equity component, investors should take care not to mix insurance and investing in stocks, as outcomes will be inefficient. A simple term insurance and exposure to equity through mutual funds will be the optimal approach.

As far as the fixed-income part of the portfolio is concerned, a combination of liquid/liquid plus funds, fixed-term plans and post-office savings products may be appropriate. Investors should take care to ensure that their fixed-income portfolio does not idle in tax-inefficient and sub-optimal options such as bank deposits and corporate fixed deposits. There is no point in also locking into five-year fixed deposits though they qualify as eligible investment under Section 80C. Investors could use a combination of EPF/PPF and tax-saving products of mutual funds with a consistent track record across different time periods for Section 80C investments to save tax.

From the sectoral/thematic funds, which fund do you think should perform better in the coming years? Why?