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If my investment horizon is 10 years, can I follow an asset allocation of 70:30 (Equity:Debt)?

A 70:30 allocation can be suitable even for long-term goals, tells Ashutosh Gupta

If my investment horizon is more than 10 years, can I still follow an asset allocation of 70:30 or do I need to have 100 per cent equity? In case of 70:30, is it better to invest in aggressive hybrid funds or should I create my own mix of equity and debt?
- Chandan Agarwal

By all means, you can go right ahead with a 70:30 allocation if that gives you a sense of comfort. Because the debt allocation would give you a cushion when the equity markets are witnessing a significant downfall and if that cushion helps you stay invested and not exit the market in panic, then by all means, a 70:30 allocation can be suitable even for long-term goals of 10 years or more.

Regarding the decision on whether to go for an aggressive hybrid fund or to build the allocation with equity and debt funds, let me provide the pros and cons of both these alternatives so that you can make a more informed decision for yourself. Convenience and tax efficiency goes in favour of aggressive hybrid funds. The rebalancing is put on auto pilot and the investor does not have to do anything by himself. Also, the rebalancing happens in a tax-efficient way because when the fund sells either equity or debt and re-invests the money in other, no capital gains tax liability emerges. So they are a fairly tax efficient vehicle in that sense. The flip side of the aggressive hybrid funds is that they tend to be relatively more expensive. Their expense ratios are by and large similar to 100 per cent equity funds, despite the fact that they invest about a fourth of their money in fixed-income. So from that perspective, they tend to be a slightly more expensive proposition.

If we look at the proposition to maintain the allocation using equity and debt funds separately, the first point that goes in their favour is that this kind of allocation can be created with less expense ratio for the overall portfolio. Debt funds in this setup would have lower expense ratio. Also, the conservative investor who would like to stick only to large-caps, can choose an index fund for this kind of allocation. In that case, the expense of the overall portfolio would drop substantially.

The second point in their favour is that you get best of both the worlds. You can cherry pick the most promising equity and debt funds and combine them into a portfolio. But on the flip side, for this kind of an allocation, the investor will have to be much more hands-on. He will have to take periodic decisions, at least once a year for rebalancing and while doing this rebalancing, one also needs to keep in mind the load and tax applicability. So all these decisions call for a greater time and effort on the part of the investor.

With these variables in mind, you can take a call whether you want to go ahead with an aggressive hybrid fund or maintain the allocation on your own.

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