Give adequate equity exposure to your portfolio

Written on Wednesday, September 30, 2015
By Vishwajeet Parashar- Senior VP & Group Head - Marketing, Bajaj Capital Ltd.

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When it comes to equity, we often don't give it adequate share in our portfolio. Risk factor is the primary reason for this action. But there is some risk attached to every investment product. It's just that it is more apparent in some and not so in others. If you act too conservative and give weightage to debt funds, in long term you would regret this decision. Let me tell you why- The rate of interest which you would be earning by investing in debt funds will not be adequate to beat inflation and fixed income investments from banking sector will too ditch you when it comes to matching inflation. Bank fixed deposits are considered to be the safest of all investments, but do you think it can give a yield which is inflation proof? Never!

Strike Right Balance

Investment in equity funds is the best way to strike balance. To make your investment less volatile and stay ahead of inflation you can follow the 'age rule'. According to this formula of asset allocation, your equity exposure should be 100 minus your current age. If your age is 35 years, then your equity portion should be 65 percent. As you age, your risk appetite shrinks, and so will the equity portion. When you cross the age of 50, this is when the debt potion will overtake the equity side. This is because you have few years of regular income and you may not be able to earn in future, hence, it is not advisable to go for any major risk at this point of time.

Invest for Longer Duration

Why we are focusing on equity funds is because top equity funds have on an average given more than 20% return a year for the last 10 years. During your initial stage of career, when you have limited or close to no liabilities, you can ignore the 'age rule' and leave aside fixed income investments. This means you can contribute a significant amount in equity and let it grow over a period of time to accumulate wealth in long run. It will be a good decision if you further diversify your funds and allocate some amount to small and mid-cap funds instead of only focusing on large cap. While investing in mid-caps, give preference to safer sectors such as pharmaceutical, automobile and fast moving consumer goods (FMCG) which have a good record.

Be a Disciplined Investor

Volatility is inherent feature of equity market and if a fall is observed just after you have invested doesn't mean that your decision was wrong. Instead of getting wavered by market sentiments, remain disciplined and stay invested. Apart from choosing right funds, disciplined investment habits, it is also very important to monitor your portfolio. Building a portfolio is relatively easy task. But the real test is to keep it growing. This would require constant monitoring. Ideally, you should take a look and analyze your portfolio every three months and consult your advisor if you feel it requires some changes or some funds are constantly non-performing.

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