Your Queries – Mutual Funds: Invest 70-80% of funds in equities for long term wealth creation

I want to save for my son’s higher education which I would need after 10 years. How should I invest in a mutual fund to earn higher returns?
— Vimal Soni

Given the long investment horizon, you may invest with a portfolio mix of 70%-80% in equities (large/mid/small-cap/international – 40/10/5/15) and 20%-30% into fixed income funds. The international equity allocation offers diversification across geographies and also acts as a hedge against rupee depreciation. International equity exposure should be diversified across regions—US, Europe and Emerging Markets—to gain from exposure to diverse economic growth factors.

For investment in fixed-income, you can consider fixed income funds with a high (safer) credit quality portfolio such as banking & PSU debt funds, corporate bond funds, short-duration funds and medium-to-long term funds. You may also allocate about 5-10% of your allocation to gold as part of your strategic asset allocation. As your goal approaches (2-3 years before your goal horizon), gradually shift allocation out of equity into fixed-income funds, to reduce risk of future capital loss.

Given valuations are currently high, avoid investing any lumpsum amount and keep investing via SIP / STP route. Stick to your strategic asset-allocation (SAA) which in turn depends on your risk appetite (ability and willingness to take risk), and not try and time the markets. Evaluate performance of the funds in your portfolio vis-à-vis that of their respective category peers on an annual basis. If a fund has been delivering below -average performance consistently, switch to a more consistent one.

Will investing directly in a mutual fund reduce the expense ratio?
— RS Madhavan

A direct plan is the one that an investor buys directly from the mutual fund. Since there is no intermediary involved in this transaction, the AMC does not have to pay any commission or trailing fees, the forms, etc. This results in a lower expense ratio. If you are investing through a bank that is registered as a distributor you are investing in a regular plan (with higher expense ratio) and not a direct plan (with lower expense ratio). On the other hand, if the bank is a Registered Investment Advisor the investment could be in the ‘direct’ plan.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com.