Simple asset allocation rule for equity, debt, gold in your passive mutual fund portfolio | Manage Your Money

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If you are a mutual fund investor looking to build a diversified portfolio while keeping asset allocation principles in mind, experts have easy solutions for you. Rahul Jain, President & Head of Personal Wealth, Edelweiss Wealth Management, said that a simple rule for asset allocation is that 100 minus your age could be put into equities, as a percentage. The rest of your portfolio can be divided among debt and gold allocation.

“So if you are 40 (years old), then 60% of your asset allocation can be equity. And right now, seeing the market condition, your gold allocation can be 5-10% because there is a lot of volatility in the market. That means effectively, the rest 30% can be in debt,” Rahul Jain said. “But based on your risk appetite, you can tinker with some of the allocation between equity and debt.”

Rahul Jain was one of the speakers in the panel alongside Hemen Bhatia, Head ETF at Nippon Life India Asset Management and Prableen Bajpai, Founder at FinFix and Analytics Private Limited. The panel was discussing ‘How to build an investment portfolio with passive mutual funds’ on Manage Your Money’s latest edition.

Watch the full session here:

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Further elaborating on how much stake should passive and active investments have in mutual funds, Prabheel Bajpai said an investor could choose to build their core with passive strategies, however there is still scope to add some active funds to it, especially debt. Bajpai said she would neither choose purely an active strategy nor a purely passive strategy but a combination of the two. She further added that in the large caps and now even in mid caps it is being increasingly seen that there is less scope for alpha generation.

“If you are looking at building a portfolio for a long term basis, say 15-30 years, then it makes sense to have a broader allocation, say about 50% of your overall equity exposure in the large and mid cap space,” Bajpai elaborated. “So in core you are sure you will get market returns, it’s a convenience based strategy and you are not taking any fund-selection related risk. Then the rest can be built with active strategies – like a flexi cap fund, large mid cap strategy and some allocation to the small caps,” she added.

So once an investor has decided their asset allocation, the question is where to invest that money. Hemen Bhatia helped break down the scope of choices that a mutual fund investor has in equity, debt as well as commodity side to manage their portfolio.

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“On the equities side you have both domestic as well as international equities. Within domestic equities, you have various broad market based indices like the Nifty 50 passive fund, ETF or equity fund, Next 50, mid cap 150, or small cap 250. So practically these three to four themes on broad market size can provide you 80-85% market cap exposure. So that actually takes care of your equity portion of your asset allocation,” Bhatia said. “On the debt side, the passive side also has many choices. One can bucket it into three categories – money market ETF, constant maturity funds, and target maturity funds,” he added.

On the commodity side, investors have options such as gold and silver ETF, and then there is also a fund of funds, which is for those investors who do not have a demat account. Bhatia said we also suggest the investors to discuss with their money adviser before investing but these are the plenty of choices that they have.

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