My portfolio is 70% in equity-related funds. As I would be retiring after five years, should I start redeeming from equity and invest in debt for safety?
—R S Sood
Asset allocation is a key driver of portfolio performance over the long term. Asset allocation strategy is based on one’s investment horizon and risk appetite – longer the horizon, higher the allocation to equity. As the end of the invest-ment horizon draws closer, it is advisable to follow a glide path. Based on this, the allocation to riskier assets such as equity would reduce gradually and the allocation to debt would increase. So, 70% allocation to equity can be gradually reduced to a lower target level, 30% to 40%, as one approaches retirement. The target level would be based on one’s post retirement income needs and risk appetite. Some allocation to equity can be maintained with the goal of beating inflation over time.
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I am being advised about investing in a Gilt fund with 10-year constant duration. How does this work and is it worth investing now as interest rates have still not peaked?
The 10-year constant maturity gilt funds have been around for some time. Here, irrespective of the interest rate cycle, the fund manager would maintain a portfolio maturity of around 10 years by investing in either government securities with a residual maturity of 10 years or hold a mix of securities with varying maturities but resulting in a portfolio maturity of 10 years. Typically, such funds are suited for a falling interest rate scenario or when one believes that interest rates have peaked and may not see sharp up-moves.
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Given the sharp rise in bond yields over the past 9-12 months (10-year government security currently yields around 7.26% vs 6.2% a year ago) on the back of Reserve Bank of India‘s rate hikes, a significant jump in yields from current levels isn’t expected considering that inflation has begun to recede, and RBI is expected to slow its pace of rate hikes. Given the attractive levels of yields, investors with a moderate risk appetite and an investment horizon of two-three years can consider some allocation (say 5% to 8%), to this category of funds.
Will investing in direct funds lower the expense ratio?
A direct plan is the one that an investor buys directly from the mutual fund. Since there is no intermediary involved in this transaction, the AMC does not have to pay any commission or trailing fees. A regular plan is one that is purchased through an intermediary who helps the investor understand the investment strategy of the fund, fill the forms, etc. For this service, the AMC pays commission to the intermediary. This cost then reflects as a higher expense ratio of the regular plan.
If you are investing through a bank that is registered as a distributor you are investing in a regular plan and not a direct plan. On the other hand, if the bank is a Registered Investment Advisor the investment could be in the ‘direct’ plan.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to email@example.com