What portfolio should an investor with a moderate risk opt for?

I am investing ₹25,000 monthly in five mutual funds (MFs). These are Axis Flexi-cap fund, Kotak Flexi-cap fund , L&T Emerging Business fund, L&T India Value fund, and Mirae Asset Mid-cap fund . I have moderate risk potential and my investment horizon is 10 years. Kindly suggest if I need to move from any of these funds to a balanced advantage fund?

— Name withheld on request

You are investing in three broadly diversified funds (two flexi-cap funds and a value fund), and two mid-cap oriented funds. For a person who identifies as having a ‘moderate’ risk potential, this set of funds carries high risk. For one, the portfolio is entirely equity-oriented, and even within equities, the funds tilt is towards the riskier segments of the market. 

Moving one fund to a balanced advantage fund - a fund that would again invest 70% of its portfolio in a diversified basket of stocks - is not the answer. 

The problem with having such a high-risk portfolio for a person such as yourself is that when the market takes a downturn, you may start to panic and withdraw your money, awaiting an upturn again. 

Such instincts, typical of a moderate-risk person, will harm the growth potential of the portfolio. 

Alternatively, it would be better to have a balanced portfolio with some debt allocation. For example, you could move about 20-25% of your portfolio (one of the Flexi-cap funds, for example) to a debt fund such as Kotak Money Market fund. 

This has two benefits. One, the volatility of your portfolio value will get toned down due to the presence of a stable debt fund. And two, more importantly, in times of market rally, you can do a rebalancing to take some money out of the equity funds and place it in the debt fund ensuring that you are safeguarding some profits.

 So, allocating a quarter of your portfolio to debt will fit your risk profile better while also giving you more flexibility in terms of portfolio management. 

Srikanth Meenakshi is the co-founder of PrimeInvestor.