When should you go for equity funds?

For long term, the equity allocation could be high
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First Published: Sun, Nov 18 2012. 08 54 PM IST
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I am 40 years old and I have been investing Rs.2,000 each in Birla Sun Life Monthly Income Plan, Canara Robeco MIP, HDFC MIP Long Term, HDFC Balanced and Birla Sun Life 95 per month for three years for my retirement. I would like to stay away from equity. Are these funds good enough for 20 years?
—Gunjan
Your current portfolio has 60% allocation to debt-oriented hybrid funds that invest about 90% in debt instruments and the remaining in equities. The remaining 40% of your portfolio is in equity-oriented hybrid funds that typically invest upwards of 70% in equities and the remaining in debt and cash. The schemes that you have chosen are good.
However, here are two observations about your portfolio composition. The first is regarding asset allocation. Overall, currently, the asset ratio of our portfolio is 60% in debt and 40% in equity funds. For a 20-year investment targeting retirement, the asset allocation between debt and equity is probably the reverse of what it should be. And that is after taking into account the fact that you are a conservative investor. Had that not been the case, for such a long term, the equity allocation could be higher. The reason is that over the long term, equity assets tend to perform better than debt and protect against inflation. So you may want to gradually increasing the equity fund allocation to 60% as opposed to the current 40%.
The second is regarding scheme choices. While the schemes are good, you can achieve your asset allocation goals differently and save on fund expenses. There are many pure debt funds that charge less expense ratio than equity or hybrid funds. For example, if you go with a 60:40 equity-to-debt ratio, you can invest in three pure equity funds and two pure debt funds (at Rs.2,000 each) and the overall expense ratio of your portfolio would be lower if you go with all hybrid funds.
I am 28 years old and can invest Rs.10,000 every month. I currently invest Rs.2,500 each in HDFC Top 200 and HDFC Prudence. I want to purchase a house in 12-15 years. Please advise.
—Hariharan
If you save and invest at Rs.10,000 a month for the next 12-15 years, you can hope to have a corpus of Rs.35-50 lakh (assuming a 12% long-term compounded annual growth rate). You are currently investing in a pure equity fund (in the large- and mid-cap sector) and an equity- oriented hybrid fund, both of which are good in their respective categories.
For the remaining Rs.5,000, you can choose a pure large-cap fund and a mid- and small-cap fund to round out the equity market exposure of your portfolio. Franklin India Bluechip is a good choice in the large-cap category and Religare Mid-cap fund is a good pick for the small- and mid-cap segment of the market.
Queries and views at mintmoney@livemint.com
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First Published: Sun, Nov 18 2012. 08 54 PM IST
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