If you’re a mutual fund investor looking to build a diversified portfolio while keeping asset allocation principles in mind, the experts have some simple solutions for you. Rahul Jain, president and head of personal wealth, Edelweiss Wealth Management, said a simple rule for asset allocation is that 100 minus your age could be invested in stocks, as a percentage. The rest of your portfolio can be split between debt and gold allocation.
“So if you’re 40 (years old), then 60% of your asset allocation can be equities. And right now, given the state of the market, your gold allocation can be 5 to 10 % because there is a lot of volatility in the market. This effectively means that the remaining 30% can be leveraged,” Rahul Jain said. “But depending on your risk appetite, you can cobble together some of the allocation between equity and debt.
Rahul Jain was one of the panel speakers alongside Hemen Bhatia, Head of ETFs at Nippon Life India Asset Management and Prableen Bajpai, Founder at FinFix and Analytics Private Limited. The panel discussed “How to Build an Investment Portfolio with Passive Mutual Funds” in the latest edition of Manage Your Money.
Watch the full session here:
Elaborating further on the share of passive and active investments in mutual funds, Prabheel Bajpai said that an investor could choose to build their core with passive strategies, but it is still possible to add active funds to it, especially debt. Bajpai said she would choose neither a purely active nor a purely passive strategy, but a combination of both. She further added that in large caps and now even in mid caps, we increasingly see that there is less opportunity for alpha generation.
“If you’re looking to build a portfolio for the long term, say 15-30 years, it makes sense to have a broader allocation, say around 50% of your overall equity exposure in the large and mid cap space,” Bajpai elaborated. “So you’re sure to get market returns, it’s a convenience-based strategy and you don’t take any fund selection risk. Then the rest can be built with active strategies – like a flexible cap fund, a large mid cap strategy and some allocation to small caps,” she added.
So, once an investor has decided on their asset allocation, the question is where to invest that money. Hemen Bhatia helped break down the range of choices a mutual fund investor has into stocks, debt as well as commodities to manage their portfolio.
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“On the equities side, you have both domestic and international equities. In domestic equities you have various indices based on the broad market like passive fund Nifty 50, ETF or equity fund, Next 50, mid cap 150 or small cap 250. So practically these three to four themes on size broad market can provide you with 80-85% market capitalization exposure. So that supports your share of equities in your asset allocation,” Bhatia said. “On the debt side, the liability side also has many choices. It can be classified into three categories – money market ETFs, constant maturity funds and target maturity funds,” he added.
On the commodity side, investors have options such as gold and silver ETFs, and then there is also a fund of funds, which is for investors who don’t have a demat account. Bhatia said we also suggest investors speak with their financial advisor before investing, but those are the many choices available to them.