Should I Go For Equity or Debt Funds?
Recently one of my friend who has just started investing in the mutual funds has asked me this question. In fact, when you first time enter into the world of mutual funds, you will have the same common question.
Well, see. mutual funds are basically of 4 Asset classes. They are broadly divided into 4 categories according to the asset under management.
01) Stocks – Equity Mutual Funds
02) Bonds – Debt Mutual Funds
03) Gold – Gold ETFs (Exchange Traded Funds)
04) Real Estate – REMFs (Real Estate Mutual Funds) & REITs (Real Estate Investment Trusts)
From the above 4, Equity & Debt are the 2 basic categories in which everyone should invest. Here comes the concept of “Asset Allocation”.
Well, see. you are basically investing before you want the Growth of your Capital as well as the protection of your capital from the wilder fluctuations of the stock market. And that’s why the investor do the Asset Allocation.
Asset Allocation in simple words means divide your money in different parts and putting them in different asset classes to diversify it and reduce the risk such as Stocks, Bonds, Gold, Real Estate, Businesses, Art, Web Properties, Vintage Cars, Vintage Collectibles, Rare Wines, jewellery, diamonds and there are many other Asset classes in the world. However, Equity & Debt are the two commonest asset classes.
Now, there is a Rule of Asset Allocation and that is,
120 minus your Age = Equity Allocation in percentage of your over all portfolio & rest should be in debt.
It means that if you have started investing at the age of 20 years, you should invest 100% of your money in Equity mutual funds because at the age of 20, you have a time by your side and the retirement is a long way to go so even if the stock market fluctuates, you don’t need to worry. As your age advances towards the retirement, you can gradually increase the debt allocation of your portfolio by reducing the equity allocation.
Now, in your case, your age is just 26 and you don’t have any dependents on you (Children & Parents) and your spouse is also working. So according to me, you should invest 100% of your Money in 4-star or 5-star rated Equity Diversified Mutual funds up to the age of 35 years. Later on, you can gradually reduce the equity allocation and increase the debt allocation of your portfolio.
You have just started earning and time is on your side so it is advisable to invest 100% in equity at the age of 26. Hope this much information is useful to you.