Ask Mint Money | Your needs and risk profile will determine your asset allocation

I am 25 years old and my monthly income is Rs 35,000. I want to invest Rs 10,000 every month and will need the money in the next five years. Where should I invest to get maximum gains? Please mention funds with tax benefits also.

- Jayesh Kumar

It is encouraging to see you want to start saving early in your career. Your investments should be dependent on what your financial needs are after five years. For instance, if it is meant for higher education, then the investment plan can be different than what it could be if you plan to buy a car or for paying a downpayment for a house. Your need will determine your asset allocation.

Another important aspect is your risk profile. There are two aspects here—risk appetite and risk capacity. This will help you understand how much risk you can take as well as how much risk you should take. There are many websites which offer you free financial questionnaires which will help you determine your risk profile. Once you are ready based on above, you need to start systematic investment plan (SIP) in the asset classes based on your future goals and risk profile. You can spread your investments in equity funds, balanced funds and monthly income plans (MIPs).

In equity funds you can consider multi-cap funds, large-and mid-cap funds such as Reliance Equity Opportunity Fund, HDFC Top 200 and ICICI Prudential. Dynamic have been good performers. In the mid-cap space, funds such as IDFC Premier Equity and HDFC MidCap Opportunities are few of the recommended options. In the balanced category, HDFC Prudence and HDFC Balanced have been consistent performers. This category of fund invests 65% in equity assets. The balance of 35% or less is invested in debt securities. MIP is a more moderate asset class where the equity exposure is limited to 20-30% and 70-80% of the assets are invested in debt securities. Reliance MIP, HDFC MIP and Canara Robeco MIP are the preferred schemes in this category.

As far as taxation is concerned, equity funds come under the exempt category and the returns are tax free in the hands of investor. Balanced funds, as they maintain a minimum of 65% in equity assets, at all times also enjoys the same advantage and are also tax exempt. This gives the investor an advantage in terms of debt exposure, i.e. debt as an asset class is taxable; however, through the exposure via balanced funds, they also enjoy a tax-free status.

MIP being a predominant debt asset class is taxable. However, these assets are taxable as per Income-tax Act under the head “capital gains” and, therefore, enjoy a special rate of tax. These assets are also eligible for indexation benefits—inflation can be factored in and hence if held for long period (which is applicable in your case) are highly tax-efficient.

Surya Bhatia is a certified financial planner and principal consultant, Asset Managers.

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