I have two portfolios, each with a very focused aim. In both I have a 70:30 allocation to equity and debt, respective.
Portfolio I: This is for my child’s education which is 20 years down the road. The funds are ICICI Multi Asset (40%), ICICI NN50 (40%), Motilal Oswal S&P 500 (20%) and SBI Const Gilt (100%).
Portfolio II: This is my retirement kitty, 30 years ahead. The funds are Canara Equity Hybrid (40%), UTI NN50 (40%), Motilal Oswal Nasdaq 100 (20%) and EPF & IDFC Gilt (100%).
It is good to see how you have segregated the two goals and have portfolios for each.
You are investing up to 40% in equity hybrid funds. These funds typically hold 75% in equities and 25% in other asset classes like fixed income and/or gold. So effectively your overall portfolio equity allocation is 63%.
- Recommendation: Given your investment time horizon of 20 & 30 years, we recommend that you can take on some additional risk by increasing overall equity allocation to 80%. This will help you build a larger corpus over time.
While investing in an index fund is a great way to take equity exposure, we think you are overexposing yourself to the NIFTY Next 50 companies. While over the longer term the NIFTY Next 50 has delivered higher return, it has come at the cost of greater volatility and larger downsides. See below charts.
- Recommendation: Split this exposure to 20% in a NIFTY/Sensex Index Fund and 20% in a NIFTY Next 50 Index Fund. This will create a more balanced index fund exposure.
While there is no credit risk associated with gilt funds, there is a fair bit of interest rate risk in these funds. As interest rates move up, there can be a significant negative mark to market (MTM) impact on the NAVs of these funds. There have been periods of negative returns on gilt funds due to interest rates rising. The most recent case was in 2017, post which yields have trended lower albeit with some volatility. See below chart.
- Recommendation: Build a core holding of Corporate Bond and Short Duration Funds and taking some exposure to Gilt funds. This can be done in a 75%:25% proportion.
NIFTY 50 Index
NIFTY Next 50 Index
Gilt funds and interest rates
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