Your Queries: Mix of equity, debt assets must to optimise portfolio performance

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Published: January 21, 2020 12:42:45 AM

An asset allocation-based approach is one of the key determinants of a portfolio’s performance

equity, equity debtThe fixed-income allocation can be into accrual fixed income categories with a high (safer) credit quality portfolio.

* I have got some money from sale of a property. I do not want to buy another property. After paying capital gains tax, how can I invest the money in mutual funds for higher returns?

–Rajesh Kumar Singla

An asset allocation-based approach is one of the key determinants of a portfolio’s performance. Depending on your risk profile and time horizon, you can invest in a mix of equity and debt asset classes. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which have the potential to deliver considerably higher returns compared to fixed income over the long term. The equity allocation should be largely into large-cap mutual funds, with some exposure to mid and small-cap mutual funds. You may have some exposure to international equity which provides diversification benefits and a hedge against currency depreciation.

The fixed-income allocation can be into accrual fixed income categories with a high (safer) credit quality portfolio. In terms of the underlying equity and debt mutual funds, you can consider mutual funds that have a consistent track record of atleast five years. Also the investment can be made through Systematic Transfer Plan (STP), whereby the lump sum can be invested in liquid funds and transferred to desired equity and debt funds over a monthly frequency over 12-18 months. This will enable you to derive rupee cost averaging benefit while investing and avoid ‘timing the market’.

* I plan to invest Rs 10,000 every month in equity mutual fund for five years through systematic investment plan (SIP). Should I select one or two funds to invest the money every month?

—Ravindra Malik

An asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance. The allocation to equity (high risk – high return asset class) should depend on your risk appetite and time horizon. For your equity allocation, you may consider investing across large caps (75%), midcaps (15%) and smallcaps (10%). Given the available SIP investment of `10,000 you can consider two funds in the large-cap space, and one fund each for the midcap and small cap exposure. Consult your financial advisor before taking any investment decisions.

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

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