Asset Allocation of a portfolio

Everyone says that Equity investment is the best option for long term capital appreciation, but as we have seen it is difficult for us to decide on which stocks to buy or sell at any point of time. So the next best option is Mutual Funds. It sounds so easy, but when we go to invest in mutual funds, you have so many choices. One of the easiest things to do is first invest in ELSS schemes, this is the best because you do not have to think too much and it will save you tax. The maximum tax deduction under section 80C is Rs.1.5 Lakhs per year. This has a lock-in period of three years.

Now that the easy part is done, which schemes should we invest in? Your portfolio should be made up of Large Cap, Mid Cap and Small Cap funds. The Large cap funds are usually passively managed funds, there are actively managed funds as well, look at the track record over a long period of time and choose the fund. Then there are Mid Cap funds, these funds are a bit riskier, but they offer better returns then large cap funds. Then there are small cap funds, these are the riskiest, but here again the long term returns are the best. If you have 3 good funds one each in Large, medium and Small Cap, you would have covered most of the market, then you do not need to go for multi-cap, thematic or sectorial funds.

As regards debt, you could have some savings in Provident Funds or you could go for some debt funds. Then there are balanced funds, these are for people who are closer to their retirement, and looking for regular returns. These funds invest in Equity as well as debt. Depending on your stage in life, you could decide on going for debt oriented or Equity oriented balanced funds. The good part of balanced funds is the gains made in equity are protected by debt component. The risk of these funds is usually moderate. Asset Allocation depends on your stage in life or the purpose of investment, so choose wisely, it should not happen that you invest for a particular purpose and when you need the money, the market is down, so sit with your financial advisor, before deciding on your asset allocation.