I am 29-year-old and earn Rs 30,000 per month. I want to start SIP in mutual funds. What should be my asset allocation?
An asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) is advisable 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. The allocation to equities should be a function of your risk profile and investment horizon as related to your goal. Assuming a long horizon of 10-plus years given your age, you could look to invest with a portfolio mix of about 85% into equities (large/mid/small-cap/international – 55/10/5/15) and 15% into fixed-income funds. The international equity allocation offers diversification across geographies and acts as a hedge against rupee depreciation. 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 and medium to long-term funds. One could also have 5-10% exposure to gold, from a diversification perspective as gold has a low correlation with other asset classes and is seen as a safe-haven asset in times of global risk-off sentiment.
Subject to the investment amount, one can consider hybrid funds such as balanced advantage funds – where the asset allocation across equity & debt is dynamically managed – or aggressive hybrid funds – where the allocation to equity and debt is largely static at 65-75% to equity and remainder to debt. The allocation to international equities can be made through globally diversified equity funds or geography focused funds such US, Europe and emerging markets dedicated funds.
As your goal approaches (2-3 years before retirement), shift allocation out of equity into fixed-income funds, to reduce risk of future capital loss in the portfolios. Diversification is a key aspect while constructing a portfolio, as it cushions the portfolio against any adverse movements of a single security/asset class. One should be reasonably diversified across asset classes (equity, fixed-income, commodities), sector, style (value/growth) and even fund houses. It is recommended to have an emergency corpus in place worth at least six months of expenses, and a term plan and a health cover in place to safeguard your family against any untoward incident.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org