How to invest in mutual funds: This is the way to start your own portfolio

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Published: January 22, 2018 3:50:19 AM

Asset allocation is based on one’s investment horizon

Asset allocation, mutual fund, how to invest in mutual fund, Systematic Investment Plans, debt investments, ELSS, AUM, Indian equitiesA suitable asset allocation is typically based on one’s investment horizon and risk appetite.

My current age is 24 and I want to invest in mutual fund. Please tell me how can I start my portfolio and what will be good for me?

—Rajesh Kumar

The asset allocation i.e. the mix of various assets including equity, debt, gold, etc. held in a portfolio is considered one of the key determinants of the portfolio’s performance, in terms of risk & return. 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. For example, if the investment horizon is 10 years and above, then 70% to 80% of your investment portfolio could be allocated to equity and 20% to 30% to debt. In case you hold other debt investments, in the form of PF, PPF, etc., fresh investments could be made into two or three equity funds through monthly Systematic Investment Plans (or SIPs).

For the aforementioned 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. If you seek tax benefits under section 80C, then you may start a SIP in an Equity-Linked Savings Scheme (ELSS) which typically have a diversified equity portfolio. However, it should be noted that ELSS funds carry a lock-in period of 3-years. Additionally, one can consider investing in an International equity fund, which invests in European or Asian equity markets. International equities provide exposure to different economic drivers (vis-à-vis Indian equities), thereby helping diversify one’s portfolio.

When selecting funds, it is advisable to consider their 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).

How can I transfer some units of mine to my daughter as a gift?
—P V Dinesh

Mutual fund units can be transferred to another person only after the demise of the unit holder. You can make your daughter a nominee of your folio. However, if you want to gift your daughter some of your units now, then you would need to redeem those units and then transfer the proceeds to your daughter’s account. She can then use that money to buy mutual fund units for herself.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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