While fixed income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed income.
I want to invest Rs 1 lakh for tax saving purpose. Is investing in lumpsum advisable at this point of time or should I wait for the market to come down or should I start a SIP instead? I would like to be invested for more than 5 years in an ELSS fund. Also, how I can diversify my portfolio?
Investors should ideally follow an asset allocation-based approach (mix of equity and debt) for investing towards one’s goal. While fixed income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed income. Valuations play a crucial role while entering any asset class. Lower valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. Given the cyclical nature of equity markets and high volatility, invest via the SIP route.
ELSS funds are equity-oriented funds offering tax-savings as the amount invested is deductible under section 80C. However, these involve a lock-in period of three years. For other than tax-saving purposes, look at other equity categories for your equity allocation.
Assuming an aggressive risk profile given a time horizon of 10+ years, you may invest with a portfolio mix of about 80% into equities (Large/Mid/Small-cap/International – 50/10/5/15) and 20% into fixed income funds. On the domestic equity side, one can consider flexi-cap or large and mid cap funds, which can provide allocation across large, mid and small caps. International equity allocation offers diversification across geographies and also acts as a hedge against rupee depreciation.
Here one can look at global equity funds that invest across various different markets. For investment in fixed income, you can consider fixed income funds with a high (safer) credit quality portfolio such as banking & PSU debt funds, corporate bond funds, short duration funds and medium to long term funds. Alternatively, based on the investment ticket one can consider hybrid funds which invest in a mix of equity, fixed income & other assets; categories include Aggressive hybrid, Balanced Advantage, etc. You can also allocate 5-10% of your portfolio to gold. Gold offers a hedge against inflation and a safe-haven asset in times of market drawdowns.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to email@example.com