Is it better to increase my allocation to flexi cap funds through lumpsum investment?
—Pawan Kumar
Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. Volatile asset classes (equity, gold) witness sharp cycles with both strong up-move phases and down-move phases. Given their cyclical nature and high volatility, it is advisable to invest in a staggered manner, via the SIP / STP route. This facilitates regular investments at periodic intervals, enabling an investor to average out the cost of his investments. And benefits investors in falling markets since they would be buying units at cheaper prices.

The allocation to equities should be a function of your risk profile and investment horizon as related to your goal. Flexi-cap funds have the leeway to invest across market caps without any restrictions on segment-wise allocations. However, note that though the large-cap, mid-cap and small-cap segments offer different risk-reward propositions, their performance is still highly correlated (correlation of >0.8 observed between any pair of market cap segments over the last five years) given they belong to the same asset class, i.e., equity and tend to respond similarly to the same set of economic drivers. Hence, investors are best suited to stagger their investments over a reasonable horizon while investing in such funds.

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As the markets are rising now, should I redeem some units to book profits and invest the money in fixed maturity products?
— name withheld
Equity markets have been highly volatile in 2022, given the uncertainty prevalent across the globe driven by a multitude of factors. Domestic equities (S&P BSE 500 Index) witnessed a drawdown of 17.10% in the YTD period amid significant FPI selling, while global equity markets (MSCI ACWI Index in INR terms) witnessed drawdowns to the tune of nearly 20% in H1:2022.

Domestic markets have since rallied sharply by 18% (June 2022 lows to September 22, 2022) as investor sentiment remains strong and amid strong FPI inflows more recently. Although, some of the risk factors such as aggressive monetary policy tightening, high inflation, and the resultant impact on corporate margins, global growth slowdown may not be truly priced into the current market valuations. Given the recent run-up, you should consider rebalan-cing your asset allocation back to the recommended long-term target asset allocation in case of any material drift due to market moves. So, if the equity allocation is higher than targeted you could reduce it and move the allocation to debt.

Fixed maturity plans like other debt funds invest in interest-bearing securities and bear similar risks (market risk, credit risk) except for liquidity risk; since FMPs are closed-ended products and can only be redeemed on maturity. FMPs are listed on exchanges wherein units can be traded among market participants; however, liquidity is poor as not many participants engage in active trading. Alternatively, you could consider target maturity Gilt funds (much safer given the sovereign guarantee) having a maturity date close to your investment horizon.

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