I want to start a systematic investment plan of Rs 24,000 per month. I have made a set of four choices. In the first choice, I want to invest Rs 6,000 each in Reliance Growth (Dividend), Reliance small-cap (G), IDFC Remium Equity Plan A (G) and HDFC Top 200 (G). The second option is Rs 12,000 in Reliance Growth (Dividend), Rs 6,000 in Reliance small-cap (G) and Rs 6,000 in HDFC Top 200 (G). The third option is Rs 12,000 in Reliance Growth (Dividend), Rs 6,000 each in Reliance Small-cap (G) and IDFC Premium Equity Plan A. The fourth choice is Rs 6,000 each in Reliance Small-cap (G) and Reliance Growth (Dividend) and Rs 12,000 in HDFC Top 200 (G). Which combination works?
As we have often said in this space, a good portfolio design needs to start with a sound asset allocation plan (AAP). A good AAP needs to be based on time-tested theories of risk/return behaviour of various asset classes. Certain asset classes are riskier than others, while having the potential for higher reward. Large-cap assets are riskier than medium- and small-cap assets. Sectoral funds are riskier than broadly diversified funds. Equity as an asset class itself is riskier than the debt asset class.
Since you have not indicated a time frame, I assume you are investing for the long term. Three out of the four funds in your list are small- and mid-cap funds, among them one is a relatively new fund that focuses purely on small-cap stocks. These are risky choices. Only HDFC Top 200 is a large-cap-oriented diversified fund. Among the AAPs you have listed, the last one—which has half the money going into a large-cap fund—is most prudent.
However, a better option will be to play it safe and include another large-cap-oriented fund such as DSP BlackRock Top 100 or ICICI Prudential Dynamic to bring up your allocation to this category to about 70-80% of your portfolio.
What is a good asset allocation percentage for a new investor for long term (at least 10 years)?
A good AAP depends on the time frame of investments and risk tolerance levels. A new investor may know the time frame, but he can only estimate their risk tolerance. One would have to invest and see their portfolio values fluctuate with the market to understand how much volatility he can afford to have. Hence, it may not be prudent to design an asset allocation plan for a new investor for long term. After a year of investing, you will understand the market and your risk tolerance and will be in a position to change investments for the term beyond this period.
You can start with an asset allocation as a conservative investor—50% in equity and 50% in debt. Or, simply start with equity-oriented balanced funds. After a year or two, once you are comfortable, we can re-engineer it for your long-term requirements.
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