Your queries (mutual funds): stick to the long-term asset allocation plan even if equity holdings are yielding good returns
I have invested in a few mutual funds through SIPs. In one of my mutual funds, the current value of the fund is 40% higher than what I have invested in the fund in the past two years. If I only get the value out of profit, while pursuing my SIPs for the long haul, then what will happen? What will be the impact on the fund?
– Rajib Sen
Equities are the most favored asset class for long-term wealth creation, with the potential to generate inflation-adjusted returns above those of most asset classes. Lower (cheaper) valuations when entering any asset class reduce the risk of high future capital loss and improve upside potential, and vice versa.
However, retail investors should ideally stick to the recommended long-term asset allocation, which in turn depends on their time horizon and risk appetite, and not try to time the markets. You may want to consider rebalancing your asset allocation towards target weights if there is a significant drift due to market movements.
Ideally, withdrawals should be made to cover all planned / unplanned expenses. Withdrawing any corpus would reduce the value of your portfolio to the extent of the amount withdrawn. In addition, you could lose any subsequent gains on the withdrawn corpus that would have accumulated until the end of your investment horizon.
Withdrawals defeat the purpose of investing which is to increase your investment body and accumulate the benefits of membership. Given that these are equity funds in view of the returns, only the corpus linked to the units obtained from SIP in the first year would currently be free of any exit charge. Additionally, you should be aware of the tax expenditure on the earnings made.
In a multi-capitalization fund, will the manager change the asset allocation according to market movements or do I have to specify the allocation?
Multi-cap funds have the mandate to invest at least 25% of the fund’s corpus in each of the large, mid and small cap segments. The actual allocation would depend on the fund manager’s opinions and / or conviction levels on the respective market capitalization segments at different times. Investors do not have a say and therefore do not need to specify an allocation.
The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]