If you have a financial goal, such as children’s education or buying a car, around the corner, never buy an equity fund, even if its returns are good over various time periods. That’s because equities can be volatile in the short term.
Many mutual fund distributors push investors towards equity funds because of higher commission. They typically pitch large-cap funds, which are considered more stable. But it’s best to stay away from them if you need money soon. Equities work best if you stay invested for the long term, but closer to your goal, you should start shifting to safer assets.
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Says Ajay Pruthi, Sebi-registered investment advisor (RIA) and founder of PLNR, an advisory firm: “Have an investment horizon of above five years if you are investing in equity. Let’s say your goal is to save for your child’s education five years from now. For an investor with average risk tolerance, it is advisable to invest 15-20 per cent in equity, and the rest in debt from the first year. However, if your goal is 10 years away, and you have a high risk tolerance, you may invest up to 50 per cent in equity. You should avoid investing your entire portfolio in equity unless your goal is 20 years away. Even with such a long investment horizon, the returns are not guaranteed, so rebalance from equity to debt nearer to your goal.”
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He explained with an example. Before Covid-19 hit, people who were nearing their retirement and didn’t shift to debt had to postpone their goal by a few years.
Says Avinash Luthria, a Sebi RIA, “If a person had 80 per cent of their net worth in equity in 2008-09 when the Nifty 100 TRI Largecap index crashed by 61 per cent, then their net worth would have dropped by 49 per cent. Apart from billionaires, everyone will panic and sell most of their equity holdings to prevent further loss. From the same crash, the Nifty 50 TRI Index took roughly 12 years to recover.”