Why you must increase your annual investments

By Morningstar |  08-08-19 | 
 

We believe that investors should consult with a financial adviser before investing. What we offer are just broad suggestions.

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Do you advise on debt mutual funds being a part of a portfolio? I am looking to build a portfolio of Rs 20 lakhs. What do you think?

- Sushant

That question will depend on your personal circumstances.

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. Asset allocation is an investment strategy which involves optimizing risk adjusted performance by investing across multiple asset classes such as equity, debt, commodities, etc.

Debt (or fixed income) plays an important role in asset allocation as it provides a stable stream of income and is less volatile than equity. It lends a balance to the portfolio reducing the portfolio volatility given its less than perfect correlation with equity. Also, debt is favorably taxed compared to other interest-bearing instruments such as fixed deposits, as they offer cost indexation benefits to investors which lowers their tax outgo. They also offer upside in the form of capital gains when yields fall.

Debt mutual funds invest in instruments such as G-secs, T-bills, corporate bonds, certificates of deposit, commercial paper, etc. Investment in other than sovereign securities are subject to credit risk. Owing to the liquidity crisis in the NBFC space post the default of IL&FS, DHFL, etc. some debt mutual funds had marked down investments due to rating downgrades and defaults. One should examine the portfolio quality of a fund before investing. You may look at Banking PSU Funds which have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective. If you have a horizon of more than 5 years, you may allocate some portion of your corpus to equity.

What should you do with a corpus accumulated after the term of your SIP finishes and you are not investing through SIPS in the MF anymore? In case the fund continues to do well, should you keep the corpus there or should you redeem and reinvest else where?

- Reema

You may decide to remain invested in a fund if your goal horizon permits. Review the portfolio to assess if the asset allocation is in line with your risk-profile at that point in time. As your goal approaches (last 2-3 years), your allocation should be predominantly in fixed income. For regular income needs, you may decide to withdraw fixed amount at regular intervals in the form of SWPs (systematic withdrawal plans).

I want to accumulate a sum of Rs 1 crore in 10 years. I can invest Rs 30,000 per month, and I will increase this amount every year by 30 percent. Also, I have a moderate risk appetite. Please suggest me about constructing a portfolio, what percentage should I invest in debt and equity funds. Can you also suggest some funds with that I can start investing?

- Sandeep

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

Given the horizon of 10 years and a moderate risk profile, you may have an asset allocation of 70% to Equity and 30% to Fixed Income. The equity exposure should be across Large caps (55%) and Midcaps (10%) and Small caps (5%). Of the allocation to equity, you can consider exposure to international equities to the tune of about 5-10% for diversification and hedging against currency risk. For investment in fixed income, you can look at accrual fixed income categories such as Banking PSU Funds, ST Income funds and Corporate Bond Funds with a high credit quality portfolio. Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective. As your goal approaches (last 2-3 years), shift allocation out of equity into fixed income.

Investing Rs 30,000 per month as per recommended asset allocation, you may be able to attain your goal comfortably reaching about Rs 2.1 crore at the end of 10 years, assuming the 30% annual increase in SIP amount. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.

My portfolio:

  • Real Estate – Rs 1 cr
  • Mutual Funds – Rs 10 lakhs
  • ULIPs – Rs 9 lakhs
  • Home Loan – Rs 34 lakh
  • Cash in hand – Rs 4 lakh
  • Gold – Rs 2 lakh
  • My daughter it 10 years old. I need to save for her education and marriage.

In the next 5 years, I need at least Rs 1 cr or a way to generate at least Rs 1 lakh per month as passive income. Can invest Rs 1 lakh per month.

- Shailendra

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and  return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

Assumptions:

  • Education goal of Rs 40 lakhs and marriage goal of Rs 30 lakhs in present value terms, at the end of year 8 and year 14 respectively
  • Inflation rate of 5%
  • Current corpus of 25 lakhs is available for investment.

Given the goal horizon and assuming a moderately aggressive risk profile, you may have an asset allocation of 65% to Equity, 30% to Fixed Income and 5% to Gold. The equity exposure should be across Large-caps (55%), Mid-caps (6%) and Small-caps (4%). Of the allocation to equity, you can consider exposure to international equities to the tune of about 5-10% for diversification and hedging against currency risk. For investment in fixed income, you can look at accrual fixed income categories such as Banking PSU Funds, ST Income funds and Corporate Bond Funds with a high credit quality portfolio. Given the current debt market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective. As your goal approaches (last 2-3 years), shift allocation out of equity into fixed income.

Investing Rs 1 lakh per month as per recommended asset allocation, you would be able to withdraw about Rs 1 crore corpus at the end of 5 years which you may use towards paying off your home loan. You would also be able attain the education and marriage goals, with an additional corpus of about Rs 44 lakhs to spare post meeting the marriage goal. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.

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