Have an Optimal Asset Allocation for Each of Your Goals

Sector and thematic funds fund should be avoided until you are confident about your ability to pick the right sector and have clarity on when to enter and exit

Investing is a process that begins when you start investing and gets completed when you achieve your investment goals. In fact, for some of the goals like retirement planning, the process begins with accumulating a corpus, and followed by a plan to generate regular income. The success of your investment process largely depends on your investment strategy and asset allocation. Considering that you may have short-term, medium-term and long-term goals, the strategy and asset allocation for each one of them has to be different.

For example, while investing for short-term, the focus has to be on capital protection, and while doing so, look to earn higher returns than traditional options like banks deposits, small savings schemes and bonds, etc. Similarly, for the mediumterm, the focus has to be on earning healthy returns in a manner that the impact of volatility is curtailed so as to minimise the risk of losing capital. A portfolio mix of equity and debt in varying proportion, based on your time horizon and risk profile, works well. There are a variety of debt and equity-oriented Hybrid Funds that can fit the bill. 

Of course, funds with an exposure of 35 per cent or more in equities have an edge in terms of tax-efficient returns as you can claim indexation benefit and improve your post-tax returns considerably. As for investing for the long-term, the objective should be to stay ahead of inflation and earn positive real rate of return. Equity, as an asset class, plays a significant role in ensuring this for you over the longer term. The key factors in deciding the asset allocation should be your time horizon, risk profile and the corpus that you may like to create at the end of your defined time horizon.

Considering that equity is an aggressive asset class – albeit with the potential to offer higher returns – you should begin by investing in well-diversified categories of equity funds like flexi-cap, multi-cap, Large-Cap and Mid-Cap funds. There is always a scope of indexing a part of your portfolio by including passively managed funds in the portfolio. However, you must remember that Indian markets still provide opportunities for the fund managers to create an alpha while investing in different segments of the markets. Therefore, actively managed funds in categories such as mid-cap, Small-Cap, flexi-cap, multi-cap, focused as well as large-caps mid-caps have the potential to generate higher returns than passively managed funds.
 

Of course, you need to be careful while deciding the proportion of exposure to mid-cap and small-cap segments and choosing the options to invest in them. Once you become familiar with the attendant risk of investing in equity funds and have more clarity on how to work out your segment-wise exposure, you can consider investing in mid-cap as well as small-cap funds. Sector and thematic funds fund should be avoided until you are confident about your ability to pick the right sector and have clarity on when to enter and exit.
 

Also, while deciding whether to invest in a sector fund or not, have a close look at sector allocation in your existing portfolio to ensure that you are not investing in a sector that already has sizeable exposure in your portfolio. Those who may not have the risk profile to invest significantly in equity funds can consider investing in equity hybrid and balanced advantage funds. These funds invest in a mix of equity, debt and arbitrage. Equity and equity-oriented hybrid funds are tax-efficient as long-term capital gains i.e. gains on redemption of units after 12 months are taxed at 10 per cent and short-term capital gains i.e. capital gains on redemption of units within 12 months are taxed at 15 per cent.