I plan to start a third SIP of Rs 10,000 per month. I have one in a large cap and one in a flexi cap. Please suggest.
—Ritesh Diwedi

Diversification is an important aspect to consider when building your portfolio, as it protects the portfolio from any adverse movement, as different asset classes and even securities within an asset class react differently to same set of economic engines. Therefore, follow an approach based on asset allocation (mix equities, debt, gold). Currently, both of your SIPs are in equity funds. You can look to build up an allocation to a fixed income (Rs 5,000 per month) and an international equity fund (Rs 5,000). The international equity allocation provides geographic diversification and acts as a hedge against rupee depreciation. For fixed income securities, you can consider investing in Kotak Bond Fund (Rs 2500) and Nippon India Banking & PSU Debt Fund (Rs 2500). For allocation to international funds, you may consider allocation to the NAVI US Total Market FoF, given the SEBI restrictions currently in place on funds investing overseas (excluding ETFs in foreign).

Do I have to redeem money every year to avoid paying long-term capital gains if I redeem after many years?
—Avinash Kumar

Capital gains on equity-oriented funds held for more than a year are termed long-term gains and taxed at 10% on gains above Rs 1 lakh per annum. The capital gains exemption on the first Rs 1 lakh amounts to just Rs 10,000 (excluding cess and surcharge). However, to claim this benefit, the market value reimbursed would have to be subject to market risk, i.e. the risk of adverse market movement between the exit date and the reinstatement date, which would be spaced about 3 days considering the T+3 refund for equity funds. If the markets rise sharply between the exit and re-entry dates, you could be negatively impacted as the loss from not having this appreciation may be greater than the profit of Rs 10,000 derived for the year. Therefore, stay invested and don’t try to shuffle your portfolio given the market risks.

The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]