I am a 30-year-old working professional. I have noted certain terms like core, satellite, and exposure to equity and bonds. I am aware of the equity exposure rule of 100 minus the age, as discussed in one of your columns. I would like to know some ‘general principles' of fund investing, with respect to how much of the corpus should form the core (and satellite), and how many fund houses should form the elements of the core. Consider me as an investor starting afresh, and please let me know how a portfolio can be built if I can park Rs 10,000-15,000 a month.

— Ajay Kumar

Mutual fund investments, like any endeavour, require a systematic and disciplined saving habit.You need to first set your goals and the amount you need to save and can save.Then, assess your risk appetite, to choose the investment avenues, and finally decide on the timeline for investing, based on the savings and investment options. So, you may want to save for retirement, or purchasing a house, or a child's education and marriage. While 100 minus age is a thumb rule to equity allocation, it can differ, based on your risk appetite.

Lastly, the investment horizon, especially in equities, must be at least 5-7 years, if not longer. The longer you hold an equity portfolio, the lower will be the volatility. That improves the chances of generating higher, inflation-beating returns.The next process is the selection of funds. You must choose funds that have a good performance record. This means beating its benchmark consistently during one-, three- and five-year periods. Such funds should have contained declines during market falls, and also participated well during rallies.

MONITOR PERFORMANCE

Fact sheets of funds give the portfolio of stocks and sectors, and also their returns. This will provide an idea on if the fund has taken timely calls in stocks/sectors.If you are more statistically inclined, you can go one step further, and look at ratios such as Sharpe, Treynor and Standard Deviation, which give good measures of risk. These give you an indication on if you are compensated with appropriate returns for the risk that you take. Lastly a little while before your goal, say six months to a year, you will do well to move your equity exposure to safer debt options. However, if there are any unusual profits in any year, you should book profits.

PORTFOLIO

Coming to the second part of your question on core and satellite investing, it is just a strategy for portfolio construction. The core is the main portion of the portfolio, which you would retain for the entire tenure of your portfolio, as it comprises very high quality funds. The satellite portion is generally the funds that would pep up overall portfolio returns with slightly higher risks. These require active management of buying and exiting when the time is apt. The definition isn't watertight, and both must be reviewed periodically.

With regard to the last part of your question, you can allocate Rs 10,000 for the core portion, and Rs 5000 for the satellite part. Restrict the number of funds to 4-5, with not more than two from one fund house. Since you have just started investing, choose diversified and balanced funds. A model portfolio could be Rs 3,500 each in HDFC Top 200 and IDFC Premier Equity, and Rs 3,000 in HDFC Prudence. This can be your core portfolio. For the satellite part, consider parking Rs 2,500 each in S&P CNX 500 ETF and UTI Opportunities.

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