Should you have global allocation in your portfolio?

By Morningstar |  11-02-20 | 

Here is our broad take with suggestions to both the queries at the end of the article.

You can post your query by accessing the Ask Morningstar tab. Our team will endeavor to answer queries ONLY related to mutual funds and portfolio planning from our registered readers.

I work in Bangalore for an American MNC. They gave me RSUs last year that got vested. Should I sell them and buy mutual funds here in India? Should I let it grow instead of selling? Is it good to have some global exposure in a portfolio?

- Amar

Investment in single security is subject to the company-specific risks and requires active monitoring of the investee company. It increases the uncertainty for an investor while planning for his financial goals, as the security may be subject to significant  volatility and drawdowns.

On the contrary, mutual funds offer investors diversified exposure across multiple stocks, which lowers the investment risk as various portfolio companies respond differently to various factors. Also, mutual funds offer professional fund management expertise at reasonable costs, and also have a research team with the requisite infrastructure to monitor the portfolio companies.

International allocation offers benefits of diversification across geographies via participation in different economic growth drivers and works as a hedge against INR currency risk. There are mutual funds domiciled in India which offer investments in international markets such as the U.S., Europe, Asia ex-Japan and China. You may retain a portion of the foreign holding  based on your conviction on the stock. From a fundamental diversification perspective, you may consider allocating 5% - 20% of the overall portfolio to international equities, based on investor's risk profile.

I am 35 years old. I want to start investing. I would like to start with Rs 3,000 as SIP. I want to invest it for minimum of 5 years. With this amount I am looking for investment in my house. The next goal is retirement. How must I start? I have medical insurance and a term insurance as well.

- Abhishek

For portfolio construction, 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. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity, which has the potential to deliver relatively higher returns compared to fixed income over the long term. For a multi-asset portfolio, you may have about 2-3 funds across each asset class which would also depend on the amount being invested from an investability perspective.

Given no information on the market value of existing investments and assuming a horizon of 5 years for your home purchase, you can start with a portfolio mix of about 50% into equities (LC/MC/SC – 40/10/0) and 50% into fixed income funds. For investment in fixed income, you can consider fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Medium to long term funds. Investing Rs 3,000 per month as per recommended asset allocation and increasing the SIP amount annually by 10%, you may be able to attain about Rs 2.7 lakh at the end of 5 years. You may use the accumulated corpus along with your existing investments towards your home purchase goal.

Assuming the entire amount is withdrawn at the end of 5 years to meet the home purchase goal; for your retirement goal which would then be about 18 years away, you may then invest with a portfolio mix of 80% into equities (LC/MC/SC/International – 50/10/5/15) and 20% into fixed income funds. The international equity allocation offers diversification across geographies via exposure to different economic growth drivers and also acts as a hedge against domestic currency risk. As your retirement goal approaches (2-3 years before retirement), shift allocation out of equity into arbitrage funds, as they more tax efficient than fixed income funds for shorter holding periods. Investing in line with the recommended asset allocation, you may be able to attain about Rs 55 lakh at retirement. To attain a more sizeable corpus for your goals, it is advisable to top up your investments whenever you have any excess savings or any windfall gains. The corpus amount has been computed assuming equity market returns of 11% per annum and fixed income returns of 7% per annum.

While we suggest that you consult a financial adviser for specific advice, here is some help for the DIY investor. 

You can view individual notes on fund analysis and compare the performance of various funds.

One may also consider Morningstar Investment Packs, offered exclusively on the Paytm Money app, as a solution to help you meet your goals.

These investment packs are the outcome of Morningstar Investment Adviser India’s asset allocation and fund selection expertise. Each investment pack has 3 to 5 underlying funds, and are diversified across large cap, mid cap, multi cap, small cap equity categories as well as debt categories like liquid, ultra-short, low duration and banking & PSU. Based on an investor’s risk suitability assessment created by Paytm Money, a risk profile (Low Risk, Conservative, Moderate, Growth and Aggressive ) is identified and an appropriate investment pack is recommended to the investor. These packs are monitored on an ongoing basis and reviewed by Morningstar.

Please note, the investment packs are exposed to market risk and do not guarantee the protection of the investors’ money against capital market movements.

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