Your queries | Mutual Funds: Withdrawing any corpus will lower your portfolio value

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As the markets have become very volatile, is it a good idea to do some profit booking?
—Neeraj Verma

Equities are the most favoured asset class for wealth generation over the long term, with the potential to deliver superior inflation-adjusted returns compared to fixed-income. Equities are more volatile than most asset classes with even the possibility of a capital loss over the short term. However, as the holding period increases, the risk of capital loss diminishes. Markets have seen a sharp correction in the YTD period (~15% from the current year peak for S&P BSE 500), amid concerns over inflation, faster than anticipated US Fed tapering, the Russia-Ukraine geopolitical tensions and slowing global growth. With the recent correction in markets valuations have seen some moderation.

Over long horizons (10+ years), equities can be expected to deliver around 4-5% over the long-run inflation rate. Withdrawing any corpus would lower the portfolio value to the extent of the amount withdrawn and one might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of their investment horizon. However, from an overall portfolio perspective, you should consider rebalancing the asset allocation back to the targeted long-term asset allocation in case of any material drift due to the recent market correction. Any sharp correction in the market in response to short-term events should be seen as an opportunity to buy into the market, only after weighing in any potential impact of the event on the long-run fundamental return drivers.

In a multi asset fund, will the fund manager inform me before allocating my money in various asset classes?
—Arjun Prasad

Diversification is an important aspect to consider while building your portfolio, as it cushions the portfolio against any adverse movements, since different asset classes, and even securities within an asset class respond differently to the same set of economic drivers. Multi-asset category funds in India provide diversification benefits to investors given their mandate to invest in at least three asset classes (such as equity, debt, gold, REITs) with a minimum investment of 10% each. The fund manager based on his assessment of expected macro and market conditions goes under/overweight on an asset class.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to

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