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How to allocate funds in market dips

In times of market dips how should we divide our allocation among large cap /mid & small cap /balanced /diversified funds and keep investing regularly?

Apr 19, 2017 by Raghavendra Prasad, Patna  |   Mutual Fund

There are no set rules for investing in different category of funds in times of market dips. However, one can be benefited if the below is followed -

1. Focus on asset allocation. Example - suppose, according to your risk taking appetite your allocation is 50% each in debt and equity and you want to invest Rs 10 Lakhs. Therefore, you should invest Rs 5 Lakhs each in equity and debt funds.

2. Say after a year or so, market went up by 20% and debt has given 8% return during the period. So, the value of your investments in debt would be Rs 5.40 Lakhs and equity funds would be Rs 6.00 Lakhs. The total portfolio value is Rs 11.40 Lakhs.

3. Since your asset allocation is 50% in each, you should keep Rs 5.70 Lakhs in each fund. That means you should transfer Rs 0.30 Lakhs to debt fund by redeeming from equity fund which makes the allocation equal between the both assets.

4. Now take a scenario, where market went down by 20% and debt as usual gave 8% return. the value of your investments in debt would be Rs 5.40 Lakhs and equity funds would be Rs 4.00 Lakhs. The total portfolio value is Rs 9.40 Lakhs. That means you would have to transfer Rs 0.70 Lakhs to equity fund by redeeming from debt fund so as to make the allocation equal @ Rs 4.70 Lakhs in each.

5. If you keep rebalancing the asset allocation you will always benefit irrespective of the market going up or coming down.

6. With regards to allocation towards mid cap, large cap and balanced or diversified, it should totally depend on your risk taking ability. For example - in the above example, we saw that you can invest 50% in equities. Now, if your risk profile is high, invest in mid cap and diversified funds. If not so high, then investing in large cap will make sense. Again, if you find that even large cap looks risky then invest in balanced funds.

7. However, if you invest the 50% of equity allocation to balanced funds then remember balanced funds do already have around 35% of debts in their portfolio. Therefore, you will have to allocate more to balanced fund.

In that case, if you were to invest Rs 10 Lakhs @ 50:50% ratio, you should invest approx 20% in debt funds and 80% in balanced funds.

Hope the above answers your query in full. Thanks.

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