BackAdd debt funds to reduce the impact of market corrections
It is not possible to time investments to market highs and lows; these are known only in hindsight
PremiumI’m a first-time investor. I have invested ₹2 lakh (plus ₹10,000 SIP) in LIC Large & Mid Cap Fund and ₹1 lakh in IDBI 100 Top Fund. I’m looking for the best MFs to invest in for my retirement and kids’ education. I have two boys aged five and two.
—Ambrish
It’s great that you have started out well in time to build up investments for your children and your retirement. The choice of funds, however, needs tweaking. You need to have a diversified set of funds so that you are able to tap different opportunities that the markets throw up. You also need to introduce some debt or low-risk investments to reduce the impact of volatility that equity markets bring.
You can stop the SIP in LIC Large & Mid Cap. Hold the investments made so far. With IDBI Top 100, slowly exit the fund based on exit loads and tax impact. For the SIP of ₹10,000, use the following funds (it will be a 75-25 split between equity and debt funds): ₹3,000 in Mirae Asset Large Cap, ₹2,500 in Invesco India Contra, ₹2,000 in Kotak Emerging Bluechip and ₹2,500 in Aditya Birla Sun Life Corporate Bond.
For the amount that you redeem from the IDBI fund, invest it in Parag Parikh Flexi Cap. If you have a high risk appetite, you can split between this fund and Kotak Emerging Equity. This will give your portfolio a mix of different market caps, equity and debt. Review your portfolio once a year to see that the funds remain quality performers. If you wish to increase the SIP, try to do so within this list and avoid adding too many funds.
I had invested in a mid-cap fund in December and received returns of 11%. But for the past one week, the returns have reduced to 8%. Should I withdraw the amount and wait for some days? I’m also planning to start an SIP. I can invest up to ₹8,000 per month. Should I divide it between large-caps, mid-caps and index funds? I’m planning to stay invested for 10 to 15 years. Also, when is the right time to book profits in mutual funds?
—Kishore M.
When you are investing in equity, be prepared for declines in returns and losses. Markets will be volatile, especially in the short term, as they react to news flow, earnings and growth expectations, corporate developments, etc.
In equity, therefore, you need a minimum five- to seven-year horizon when you invest to allow market ups and downs to play out. Do not be alarmed if your fund returns dip because of market corrections; as long as your fund is doing better than the market, it is still performing for you. By exiting good-quality funds in corrections, you will be selling at a low and unnecessarily booking losses.
It is not possible to time investments to market highs and lows; these are known only in hindsight. The best course is to follow a diversified asset-allocated portfolio. When your asset allocation changes significantly compared to the original, rebalance to bring it back. In doing so, you will be booking profits in the asset class that has run up and will be adding more to the asset class that has corrected or is relatively cheaper.
Structure your SIP as follows: ₹3,000 in Parag Parikh Flexi Cap, ₹2,500 each in Kotak Emerging Equity and ICICI Prudential Corporate Bond. This will give your portfolio a 70-30 equity-to-debt allocation. If you have a low risk appetite, increase investment in the Parag Parikh fund to ₹3,500 and reduce allocation to Kotak Emerging Equity. Review your funds once a year to ensure that they remain quality performers.
Srikanth Meenakshi is foun-ding partner, PrimeInvestor.
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