I am 30 years old. I invest Rs 2,500 every month in the ELSS of Canara Robeco and Mirae Asset. I want to invest another Rs 10,000 per month. I have no other investments. Which funds must I invest in?
When you say you have no other investments, I do not know if you are referring only to equity or debt too. I shall assume that you have no investments at all, outside the two equity funds.
If you are a salaried individual, you may be availing of the Employee Provident Fund (EPF), which provides a tax break under Section 80C. Also, if you are servicing a home loan, you can get the tax benefit under this section.
I have no idea as to how long your investment horizon is, so I shall assume it is for the long term.
Here are my observations and suggestions.
Though equity is more volatile than most asset classes with even the possibility of a capital loss over the short-term, the risk of capital loss diminishes as the holding period increases. This is why you must always have a long-term perspective when investing into equity – either directly into stocks or via a mutual fund.
Valuations play a crucial role while entering any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. Given the cyclical nature of equity markets and high volatility, it is advisable to invest in a staggered manner, via a SIP route. A Systematic Investment Plan is a mode of investment facilitating regular investments at periodic intervals, enabling an investor to average out the cost of his investments. This benefits investors in falling markets since they would be buying units at cheaper prices.
In fact, by instilling disciplined investing in investors via an auto-debit mandate, SIPs are an excellent way to combat behavioral biases amid the uncertainty in the stock market.
Investors should ideally follow an asset allocation-based approach (mix of equity and debt) for investing towards one’s goal. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed-income.
Assuming an aggressive risk profile, you may ideally invest with a portfolio mix of about 85% into equities and the remaining 15% into fixed income funds.
You can consider fixed income funds with a high (safer) credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Short Duration funds and Medium to Long Term funds.
As your goal approaches (2-3 years before the goal horizon), begin to shift your investments out of equity into fixed-income funds, to reduce risk of future capital loss in the portfolios.
Your current portfolio is entirely into equity linked savings schemes, or ELSS funds. Such funds offer a tax break under Section 80C, however, they have a lock-in period of 36 months, from the date of each SIP installment. So ensure investments in other funds too.
Within equity too, it’s essential to diversify. The portfolio mix of about 85% into equities can be further segregated. Here is a broad allocation with some suggestions:
The international equity allocation offers diversification across geographies and also acts as a hedge against rupee depreciation.
It is recommended to have an emergency corpus in place worth at least 6 months of expenses, and a term plan and a health cover in place to safeguard your family against any untoward incident.
Building an Emergency Fund is NOT optional. Neither is insurance. You will always need a safety net because emergencies occur even in the best of times. Accidents. Urgent dental treatment. Travel in case of death. Sudden massive home repairs.
While it is wise to stay regular with your SIPs, to accumulate a higher corpus, it is advisable to top up your investments whenever you have any excess savings or any windfall gains.
Don’t exit a fund because of poor performance over short periods. Evaluate performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.
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