The Morningstar Investment Management team provides portfolio guidelines. Having said that, they recommend that you consult your financial adviser to help you chalk out a plan and make the final selection of funds.
To help with fund selection, you can access the Morningstar Fund Analyst Notes here. You can access other quantitative data on funds here.
I am 30 years old. I have a 10-12 year horizon. A 5-year old son. My net worth is Rs 1.7 crore with 50% in Real Estate/PPF/Gold and 50% in the financial market (majority in direct equity). I want to reduce my direct stock exposure and move towards equity mutual funds. How should I start? I can invest Rs 1 lakh every month via SIPs.
- Neeraj
I would like to invest Rs 20,000 per month in SIPs in 5 mutual funds for 10+ years. How must I do my fund selection? Is there any benefit to invest in direct plan (through Zerodha platform) vs regular plan (through ICICIDirect platform)?
- Vaibhav
I would like to invest Rs 7,50,000 for a period of 5 years. Please suggest the type of funds I should look at.
- Hari
First comes asset allocation. An optimal asset allocation mix (of various assets including equity, debt, gold) is considered as one of the key determinants of the portfolio’s performance, in terms of risk and return. A suitable asset allocation is typically based on one’s investment horizon and risk appetite.
Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. For example, if the investment horizon is 10 years and above with average risk appetite, then 60% to 70% of your investment portfolio could be allocated to equity, 10% to 20% to debt and rest to alternate assets like gold and real asset. Or, if the investment horizon is 5 years and above with average risk appetite, then 40% to 50% of your investment portfolio could be allocated to equity and rest to debt funds.
For the mentioned investment horizons, our advice is:
- Large-cap funds: 1 or 2 large-cap
- Small/mid-cap fund: 1
- Diversified equity funds that invests in large, mid and small cap stocks in varying proportions based on the fund manager’s views: 1
- You could also consider an international equity fund. International equities provide exposure to different economic drivers (vis-à-vis Indian equities), thereby helping diversify one’s portfolio. There are funds which invest in U.S., European or Asian equity markets.
- For debt funds, it is advisable to select 1 or 2 short-term income funds.
When selecting funds, it is advisable to consider their performance over at least the previous three years to five years. This along with studying calendar wise performance vis-à-vis benchmark indices (like Sensex, Nifty, etc.) and peer group would indicate consistency across time frames and market cycles. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore.) and period of existence (longer the better).
One can benefit by investing in direct funds as they carry low expense ratio compared to regular funds. Typically, the difference in direct and regular expense ratio for equity mutual funds is approximately 0.7% - 1%. A lot of online platforms offer investment in direct mutual funds. However, one needs to be aware of the services and fees/charges that these online platforms offer and charge for investing in direct mutual funds.
Is it wise to park a lumpsum in a liquid fund or debt fund and make STPs to equity funds from it? Do note the money invested will be required in next 2 years.
- Kaushik
Considering your investment horizon, you could allocate around 90-95% of portfolio to fixed income funds particularly liquid/ultra-short-term funds and short-term income funds; and the rest in equity fund. Within the debt space, you may consider allocating 60% to short duration funds and 30-35% to liquid/ultra-short duration funds. This could be deployed in 3-4 debt funds along with a large cap equity fund.
One could follow this approach of doing a systematic transfer (known as STP) from a liquid fund to an equity fund; however, you need to be mindful about the short-term capital gains taxation impact from exiting fixed income (debt) funds before three years.
Rather, you can consider staggering your equity mutual fund investment via a Systematic Investment Plan, or SIP. In fact, SIPs allow an investor to deploy the principle of rupee cost averaging to take advantage of market volatility. When the net asset value (NAV) of a fund is high (typically when markets have risen) fewer units of a fund would be purchased from the investment amount and when the NAV is lower more units of a fund would be purchased with the same investment amount. Thereby, reducing the average cost of units purchased over a period of time.
Is it the right time to invest in an equity fund? Should I wait for a correction?
- SK
Given the recent volatility seen in the equity markets due to various global and domestic factors, it might be advisable to invest through SIPs vis-à-vis lumpsum investment. Please refer to the above answer to understand why it is a good way to invest in equity funds.
Along with regular SIPs in equity mutual funds, one can also consider investing lumpsum in funds as and when the market corrects.
Do read: Should you hold cash in your portfolio when waiting for a correction?
I have a fixed deposit of Rs 3,50,000 which has matured. Which funds can I choose for long term, risk free investments?
- Kuldeep
Given that your investment horizon is long term but willingness to take risk is low, you could consider investing in 3 or 5-years Fixed Maturity Plan (FMP) and allocate some funds to liquid\ultra-short-term funds. This would be a conservative approach for allocating funds. Usually, investors with long-term investment horizon have moderate to high appetite for risk. In case you have some willingness to take risk, you could possibly consider short-term income funds and hybrid funds such as Monthly Income Plans (MIPs) as well.
FMPs are close ended debt funds where investments can be made only during the time of fund offering. These funds have a fixed maturity with investments across debt instruments such as corporate bonds. Since, these are close-ended by nature, one cannot redeem before maturity of the fund. Though FMPs are listed on the stock exchange, liquidity is very low. FMPs are tax efficient as they provide indexation benefit. Interest rate risk is limited with FMPs as the underlying instruments are held by the fund till the maturity which allows it a fixed rate of return. However, fund might carry some level of credit risk as the underlying instruments are predominantly corporate bonds.
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