In debt funds, should I diversify in three to four funds to avoid any risks?
—Anurag Kumar

For the fixed-income portion of your portfolio, you can follow a core-satellite approach, with the core (70%) of the fixed-income portfolio invested in high credit quality (safer) shorter-duration funds to minimise credit and duration risks, while the satellite portion of the portfolio can be allocated to longer-duration and credit-risk funds in line with your risk appetite. Investors taking tactical calls based on their expectations on the various segments of the yield curve, may take higher exposure to the satellite segment of the portfolio.

Diversify your holdings across two or more funds and/or fund-houses, to avoid concentration to the interest rate/credit related calls of a single fund manager/fund-house. Such diversification would cushion your portfolio against a potential sharp fall in any single holding. This would mitigate risk from any opera-tional risk event which could potentially deter access to your funds on demand. 

I have been investing in equity mutual funds for five years. Now, I want to book some profits. Should I invest the profits in an index fund?
—Saurav Khemka

Investors should follow an asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) for investing towards one’s goal. Over long horizons (10+ years), equities can be expected to deliver around 4-5% over the long-run inflation rate.

Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn and you might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon. Booking profits and moving to an equity index fund is not advisable as both active and passive equity funds have a high degree of correlation with each other, given they respond similarly to the same set of growth drivers. You can re-balance your asset-allocation back to your recommended long-term asset allocation in case of any significant drift due to the recent sharp uptick in equity markets. Move the excess allocation in equities to fixed-income funds, in line with your risk appetite.

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