MF Query Board

MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved. 

My investment horizon is more than 10 years and so in this case should I follow an asset allocation of 80 per cent in equity and 20 per cent in debt or should I have 100 per cent equity? In case of asset allocation of 80 per cent equity and 20 per cent debt, would it be prudent to invest in aggressive hybrid funds or should I have a mix of equity and debt funds?

- Meera Gandhi

Definitely, you can go right ahead with a 80:20 (equity to debt) asset allocation if you believe that it brings a sense of comfort to you. The debt part of the asset allocation would give you a cushion when the equities are witnessing a rough patch and if this cushion helps you stay invested and not exit the market in panic, then by all means, an 80:20 asset allocation can be suitable even for long-term investment horizon of 10 years or more. Coming to your second question about whether to go for an aggressive hybrid fund or to build a portfolio of funds with a mix of equity and debt funds, let us understand the pros and cons of both these alternatives as this would help you make a more informed decision.

When it comes to simplicity, convenience and tax-efficiency, aggressive hybrid funds do score more. This is because here you don’t need to manage the portfolio. Even the rebalancing is put on auto pilot. Further, the rebalancing too happens in quite a tax-efficient way as when the fund sells either equity or debt and re-invests the money in others, it does not attract any capital gains tax liability. Thus, in that sense they are fairly tax-efficient. However, on the flip side, the disadvantage of an aggressive hybrid fund is that they tend to be relatively more expensive. Their expense ratios are more or less similar to equity funds despite the fact that they invest their assets in fixed income as well. Hence, they tend to be slightly more expensive.

On the other hand, if we create a portfolio of funds by investing in equity and debt funds separately, then on the expense front these portfolios can be created with less expense ratio for the overall portfolio. Debt funds in this setup would have lower expense ratio. In fact, a conservative investor whose equity portion might comprise of only large-caps can choose to invest in an index fund and reduce the overall expense ratio of the portfolio. Moreover, in such a setup you can cherry-pick the most promising equity and debt funds and combine them into a portfolio.

Talking about the cons, for such a setup you will need to be much more hands-on. Here, you will have to take periodic decisions, at least once a year for rebalancing, and while doing so, you also need to keep in mind the exit loads and tax applicability. Therefore, all these decisions call for a greater time and effort on your part. With their respective pros and cons in mind, you can take a call whether you want to go with an aggressive hybrid fund or have a portfolio of equity and debt funds

As the equity market is trading at an all-time high, should long-term investors stay invested or should they book profit and sit on cash and again invest after correction?

- Ravikumar Makhija

Yes, the market is at an all-time high or you can say near that level. In the past two to three months, the market has been climbing higher and many are speculating whether it would witness a correction or not. However, as you might know, it is difficult to predict market direction or time the peak of the market. Currently the market is trading at a valuation which is 99 per cent higher than most of the times it has traded. Hence, in case the corporate earnings do not see an increase, it would really prove to be quite overvalued. Taking into account the economic revival that we might be witnessing, if in the next two to three quarters or say in the next few years the corporate earnings see an increase and perform as per expectations and are able to sustain, the market may start appearing to be at reasonable valuations.

Further, as the liquidity tap is still on with the Reserve Bank of India still keeping the key policy rates unchanged and the continuous inflows from foreign investors which has been more than the outflows from domestic investors, there has been no major correction in the market. Therefore, it would be quite difficult to say that we are sitting at the top of the market. Your decision on exiting or remaining invested in the fund should be guided by your investment horizon and financial goals. If your investment horizon is for 2-3 years in order to meet your financial goals, you can start redeeming your investments.

That said, do not take all the money out at once; rather, do it systematically over a period of time. But if the financial goal is long-term, then follow your asset allocation strategy wherein you may need to re-balance your portfolio by taking out some money from equity, if it has advanced substantially, and re-invest the same in fixed income assets. Moreover, follow this re-balancing periodically when your desired asset allocation goes out of the desired asset allocation boundaries. Taking out all your money from the market and waiting for it to correct might prove to be futile.

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR