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I am 33 years old and I have invested about 70% of my savings in equity mutual funds. I have a high appetite for risk and my investment horizon is long term. 65% of my mutual funds are in small-cap funds and 35% in large-cap funds, which includes ELSS. My goal is to retire early. Should I reduce my MF investments from 70% to 50% as returns in the last two years have been around 5%?

—Sanjay Bose

Your current portfolio is 70% equity and 30% debt asset class. Within equity, the exposure has been predominantly in small-caps (65%) and remaining 35% in large-cap.

The equity returns are best delivered over long term and a period of two years of low or even negative returns should not be a reason to change the asset class. At the same time, you can reduce the equity exposure if you are concerned with the returns offered by small-caps; the very inherent nature of this small-cap category is high degree of volatility along with high risk-return ratio. If it continues to deliver only high returns with low volatility and no downside, then it will be as good as fixed income product and every investor will want to have it as part of their portfolio.

Also, you cannot compare an equity asset class return with a fixed income asset class return. They are just two different asset classes as equity can deliver a return which is inflation-adjusted and debt, at best, can deliver a return equal to inflation. Equity markets percolation period is long term and while there is no assurance of its performance, there is high probability that it should do well over a long period.

I am planning to buy sovereign gold bonds in order to have some debt fund in my portfolio. Is it advisable to directly buy a gold bond or should I go for a bond fund? From where can a retail investor buy gold bonds? If I buy the bond through a broker, will I have to sell it also through a broker? Can it be sold before the maturity period? If yes, will the seller get the differential between prevailing market price and the price at which the gold bond was bought?

—K. Routray

Investment in gold and in debt schemes are like investing in two different asset classes. Both asset classes are low risk investments as the targeted return over a longer period in both the asset classes is in proximity to inflation.

If you want to invest in gold as an asset class, then investing via sovereign gold bond is surely a good option; the only limitation being the liquidity as tenor of the bond is eight years. However, there is an exit option from the fifth year onwards, which can be exercised on the interest payment dates. The gold bonds can be purchased either online or through offline modes—banks, post offices and other designated agents. The bonds are denominated in units of one gram and the minimum permissible investment is 2 grams and maximum limit is 500 grams. The bonds carry an interest rate coupon notified by the RBI and is payable semi-annually. The existing interest rate is 2.75% per annum over and above the capital gains you may earn on the bonds. The redemption price is based on the average closing price of gold of 999 purity of previous three business days from the date of repayment.

The primary advantage of these gold bonds is not only the interest rate in addition to the capital gains but also ownership of gold without any physical possession. The capital gain arising on the redemption of bonds is exempted from tax. But in case of transfer of bonds, the difference between the market price and the purchase price is the capital gains and indexation benefits will be provided for long term bonds. These bonds are also tradable on the stock exchanges. However, the trading will be dependent on the liquidity available for these bonds.

Surya Bhatia is managing partner of Asset Managers. Queries and views at

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