Investing for the next 10 years? Experts explain how much to put in equity mutual funds, gold, debt and global stocks

A 10-year investment horizon gives investors time to benefit from equity market growth, but choosing the right mutual fund categories is just as important as staying invested.

For investors looking to invest in the current volatile market, the focus should be on building a diversified portfolio rather than chasing the mutual fund categories that have delivered the highest recent returns. Relative valuations, risk appetite, existing investments and the purpose of the financial goal should determine the allocation, experts said.

Rahul Jain, president and head at Nuvama Wealth, recommends a core-and-satellite approach for a moderate-risk investor. He suggests allocating half of the equity portfolio to Nifty 50 and Nifty Next 50 exchange-traded funds (ETFs), with the remaining half spread across two mid-cap funds and two small-cap funds. This approach combines exposure to established businesses with companies that have the potential to grow faster.

Vaibhav Porwal, co-founder of Dezerv, suggests a different starting allocation for a 10-year equity investor, with 35% in large-cap funds, 25% in flexi-cap funds, 25% in mid-cap funds and 15% in small-cap funds. The right mix, however, depends on the investor's financial goals, existing holdings and ability to withstand market volatility.

Large-cap funds gain favour as valuations moderate

Recent market corrections have made valuations an important consideration when deciding how much to allocate across market capitalisations. Porwal favours a modest overweight to large-cap stocks while retaining exposure to mid-cap and small-cap companies.

According to Porwal, the Nifty 50 trades at about 19.3 times trailing earnings, below its five-year median of about 22 times. The Nifty Midcap 150 trades at about 28 times earnings, against its five-year median of about 30 times. In comparison, the Nifty Smallcap 250 trades at about 34 times earnings, roughly 20% above its five-year median of 28 times.

“These indicators shape the target allocation, and the investor rebalances back to that target once a year,” Porwal said.

Jain also sees a case for large-cap exposure, pointing to the correction in large-cap stocks over the past 24 months. Valuations in sectors such as information technology, private banking and fast-moving consumer goods have moved closer to their long-term averages, he said. Mid-cap and small-cap stocks have corrected too, but continue to trade at a premium to their respective 10-year averages.