I am 29 years old and I earn Rs 30,000 per month. I want to start SIP in mutual funds. What should my asset allocation be?
—Praveen Kumar
An approach based on asset allocation (mix of equities, debt, commodities, real estate, etc.) is recommended to invest in its objective. While fixed income securities provide portfolio stability, equities play a crucial role in long-term wealth creation. Equity allocation should be based on your risk profile and investment horizon relative to your objective. Assuming a long horizon of more than 10 years given your age, you might consider investing with a portfolio composition of around 85% in equities (large/mid/small cap/international – 10/55/5/ 15) and 15% in fixed income funds. The international equity allocation provides geographic diversification and acts as a hedge against rupee depreciation. To invest in fixed income securities, you may consider fixed income funds with a high (safer) credit quality portfolio, such as bank and PSU debt funds, corporate bond funds and medium and long term funds. One could also have a 5-10% exposure to gold, from a diversification perspective, as gold has a low correlation to other asset classes and is considered a safe haven asset in times of global sentiment. ‘aversion to risk.

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Subject to the amount of investment, one can consider hybrid funds such as balanced advantage funds – where the asset allocation between equity and debt is managed dynamically – or aggressive hybrid funds – where the The equity and debt allocation is largely static at 65-75% equity and the remainder debt. International equity allocation can be made through globally diversified equity funds or geography-focused funds such as funds dedicated to the US, Europe and emerging markets.

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As you approach your goal (2-3 years before retirement), shift allocation from equities to fixed income funds, to reduce the risk of future capital loss in portfolios. Diversification is a key aspect when constructing a portfolio, as it protects the portfolio against any adverse movement of a single security/asset class. You need to be reasonably diversified across asset classes (equities, fixed income, commodities), sector, style (value/growth) and even fund houses. It is recommended to have an emergency corpus of at least six months of expenses in place, as well as a term plan and health coverage in place to protect your family against any untoward incident.

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