After doing some research and investigation, I have come to realise that portfolio management is essential for every individual investor to create wealth. With a long-term investment horizon and balanced medium- to high-risk, I would like to seek an appropriate asset allocation strategy in my mutual fund portfolio. How should I do this allocation on a monthly basis? Can you suggest some other investment avenues apart from mutual funds?
Profile of the Investor Name: Sundara Kumar Age: 26 years Risk Appetite: Balanced Medium to High Investing Amount: Rs 22,500 per month
It's impressive to see that you have a pre-planned set of strategies before you set out. You are definitely headed towards the right direction in building a diversified portfolio.
So, first, we will highlight various investment avenues available for an investor. After that, we will discuss the model mutual fund portfolio we have designed for you. We will also highlight the appropriate allocation an investor like you should have in each of the various mutual fund categories available.
Investment in equities: If you want to directly invest in stocks, it would require some amount of knowledge of the market along with an in-depth understanding of the stock you wish to buy. You need to understand the fundamentals of the company, industry, sector and economy as a whole. The time and energy spent does not stop with the buying of the stock. You would also have to track it.
It's impressive to see that you have a pre-planned set of strategies before you set out. You are definitely headed towards the right direction in building a diversified portfolio.
So, first, we will highlight various investment avenues available for an investor. After that, we will discuss the model mutual fund portfolio we have designed for you. We will also highlight the appropriate allocation an investor like you should have in each of the various mutual fund categories available.
Investment in equities: If you want to directly invest in stocks, it would require some amount of knowledge of the market along with an in-depth understanding of the stock you wish to buy. You need to understand the fundamentals of the company, industry, sector and economy as a whole. The time and energy spent does not stop with the buying of the stock. You would also have to track it.
A more convenient option would be to consider the mutual fund route. Here you have plenty of schemes to choose from across the entire equity spectrum. There are diversified equity funds that invest across all sectors. And there are sector-specific funds that invest only in a single sector, such as banking or telecom. These funds, by their very nature, are more risky than diversified equity funds.
But a word of caution here. You must have a time horizon of at least five years when you consider an investment in equity. This holds for whichever route you take, directly into stocks or via an equity fund. And, don't park all your savings in equity. However, over the long term, do have some amount of exposure to debt.
Investment in debt: Here too, you can resort to the mutual fund route. There are long-term debt funds if you want to hold your money for two-three years or more, and short-term debt funds for shorter time-frames. There are also ultra short-term funds where you can park your money for very short periods.
But a word of caution here. You must have a time horizon of at least five years when you consider an investment in equity. This holds for whichever route you take, directly into stocks or via an equity fund. And, don't park all your savings in equity. However, over the long term, do have some amount of exposure to debt.
Investment in debt: Here too, you can resort to the mutual fund route. There are long-term debt funds if you want to hold your money for two-three years or more, and short-term debt funds for shorter time-frames. There are also ultra short-term funds where you can park your money for very short periods.
Other than mutual funds, there are plenty of other options too. Fixed deposits in a bank or post office, the Public Provident Fund (PPF), National Savings Certificate (NSC), bonds issued by the Reserve Bank of India (RBI) or the National
Bank for Agriculture and Rural Development (Nabard).
Here is what you have to keep in mind when looking at such investments.
How safe is it? If it is a nationalised bank or post office where your fixed deposit is, it is safe. If it is backed by the government, as in the case of RBI bonds, Nabard bonds, PPF, NSC and Kisan Vikas Patra, then too it is risk-free.
What are the tax implications? If you invest in a five-year bank deposit or PPF, then you get a tax deduction under Section 80C.
What is the return? Is the rate of interest taxed? The interest earned on PPF is tax-free but in other cases, it is taxed. You must look at the tax implication because this will lower your overall return.
What is the tenure of the investment? PPF is the longest with a 15-year, lock-in period. NSC, on the other hand, is for just six years.
Making the right choice: As you can see, there are two asset classes: equity and debt. The former will include stocks and equity mutual funds. While debt would include all the fixed-return instruments in the market as well as debt mutual funds.
Bank for Agriculture and Rural Development (Nabard).
Here is what you have to keep in mind when looking at such investments.
How safe is it? If it is a nationalised bank or post office where your fixed deposit is, it is safe. If it is backed by the government, as in the case of RBI bonds, Nabard bonds, PPF, NSC and Kisan Vikas Patra, then too it is risk-free.
What are the tax implications? If you invest in a five-year bank deposit or PPF, then you get a tax deduction under Section 80C.
What is the return? Is the rate of interest taxed? The interest earned on PPF is tax-free but in other cases, it is taxed. You must look at the tax implication because this will lower your overall return.
What is the tenure of the investment? PPF is the longest with a 15-year, lock-in period. NSC, on the other hand, is for just six years.
Making the right choice: As you can see, there are two asset classes: equity and debt. The former will include stocks and equity mutual funds. While debt would include all the fixed-return instruments in the market as well as debt mutual funds.
Both these assets are a must in every portfolio. But the exact allocation to each would depend on a number of factors such as the age of the investor, his income, his expenses, whether or not he is servicing loans, and his time frame (when he needs the money).
