The other approach is getting into hybrid funds, with a defined portfolio allocation. There are aggressive hybrid funds with an equity allocation of more than 65 percent of the portfolio, there are conservative hybrid funds with equity of less than 25 percent of the portfolio, there are arbitrage funds, balanced advantage funds, etc. The advantage of this approach is that hybrid funds, since they have a defined asset allocation, will reset the portfolio when there is a deviation.
Joydeep has over 25 years of experience in the financial services industry in roles spanning research and advisory. Currently he is on his own, working as a corporate trainer. He has authored four books on fixed income investing and wealth management, which have received accolades from the fraternity. Joydeep writes columns regularly in various financial publications. He is a thought leader in fixed income investing. He runs his own portal wiseinvestor.in.
Mutual Funds offer the benefit of participation in the various investment categories at any ticket size, small to large. There are 11 equity fund categories, 16 debt fund categories, and 6 hybrid fund categories. There is a professional fund management team taking care of your money. Transactions are easy and executed online. Though there is a tax incidence when you switch from one MF scheme to another, this is applicable to direct investments as well. As an example, when you redeem an equity MF with a holding period of less than one year, there is a short-term capital gains tax of 15 percent (plus surcharge and cess), which is the same as direct investment in equity stocks. If your holding period is more than one year, there is a long-term capital gains tax of 10 percent (plus surcharge and cess) beyond Rs 1 lakh of capital gains. This also is the same for direct investment in equity as well as equity MF schemes. The advantage of the MF route is that MFs per se being tax-free entities, when they tweak the portfolio and execute transactions, there is no tax on the gains. The taxation mentioned above is on the investor.
There are multiple ways you can execute your allocation. There are defined equity and debt funds as mentioned earlier. You may decide your allocation e.g. 60 percent to equity, 30 percent to debt, and 10 percent to gold. You can invest accordingly in equity funds, debt funds, and gold funds / gold ETFs. The advantage of this approach is that you get to decide which kind of fund you are getting into e.g. large cap / small cap, long maturity debt / short-maturity debt, etc. The other approach is getting into hybrid funds, with a defined portfolio allocation. There are aggressive hybrid funds with an equity allocation of more than 65 percent of the portfolio, there are conservative hybrid funds with equity of less than 25 percent of the portfolio, there are arbitrage funds, balanced advantage funds, etc. The advantage of this approach is that hybrid funds, since they have a defined asset allocation, will reset the portfolio when there is a deviation.
There is another approach to doing this allocation through the MF route. Quantum AMC offers allocation models available through their website to their investors. There is a DIY (do it yourself) option, under which there are active and passive sub-options. You define your intended allocation to equity, liquid, and gold, and the investment is executed through their in-house funds. Their approach is 12:20:80 which means 12 months of expenses (household etc) is kept in a liquid fund and the balance is invested in equity and gold at the intended allocation ratio. While investment advisors or mutual fund distributors would guide you on the allocation, doing it directly through an MF is useful for DIY investors. There are multiple robo-advisory websites that do your basic profiling and suggest an allocation. You can do your execution as well, on these platforms. However, the extent of customization as per your typical risk profile and requirements is limited as it is based on an algorithm, without any human intervention.
It has been proven through empirical data that proper allocation is the best tool to optimize returns on your investments. Adjusted for volatility, this yields optimum returns over long horizons. Discipline is important; when there is a significant deviation e.g. equity market running up, you have to adjust periodically. This helps you in booking profits when one market runs up, and taking higher exposure at attractive levels, when there is a correction. You have to decide based on the typical profile of the asset classes: equity is relatively higher risk and higher returns, debt is relatively lower risk and lower return, and gold is a good diversifier to optimize portfolio returns.
(Joydeep Sen is a corporate trainer and author.)
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