Sir, My son is 30 years old. Currently, he is investing 3K in HDFC Multicap fund, 2K in Quant Midcap fund and 1K in Quant Small cap fund, through SIP. He will invest for atleast 10 years. He doubts whether he is correctly investing in 2 different schemes of the same (Quant) AMC. Should he switch either Midcap or Smallcap to a different AMC for better returns, through different investment strategies, lesser shares overlap ratio, diversification etc? If so, suggest a good rebalanced portfolio.

Ans: To optimise your son’s portfolio, I recommend a carefully rebalanced approach. He is making wise choices by investing early, and his goal of a 10-year horizon offers great potential. A few adjustments can enhance diversification and reduce potential overlap. Let’s analyse and rebalance with these key points.

1. Assessing the Current Portfolio
Currently, your son has investments in:

HDFC Multicap Fund: A broad, diversified investment covering large, mid, and small-cap stocks.

Quant Midcap and Quant Smallcap Funds: These two are from the same Asset Management Company (AMC) and target specific market segments. While Quant AMC has a good performance history, investing in two funds from the same AMC may lead to overlapping stocks and similar strategies.

Investment in 2 Funds from One AMC: While AMC expertise can help, relying on one AMC for both mid and small caps may lead to concentration risks and limited diversification.

2. Importance of AMC Diversification
Adding another AMC brings different fund management strategies, improving portfolio resilience:

Different Investment Styles: Each AMC has unique processes and philosophies, which can result in different stock selections and management styles.

Better Performance Stability: Market cycles impact AMCs differently. Having funds across AMCs can help reduce performance fluctuations in specific sectors or styles.

3. Suggested Portfolio Rebalance
For optimal diversification, I suggest a balanced approach with funds from multiple AMCs in varied categories:

Multicap Fund – HDFC (Continue)
Keep the Existing Multicap Fund: Multicap funds provide broad exposure to large, mid, and small-cap stocks, which balances growth and stability.
Replace Quant Midcap with a Different AMC’s Midcap Fund
Switch to a New AMC for Midcap Exposure: Choosing a midcap fund from another AMC adds diversification. Midcap funds generally offer high growth, and shifting to a different AMC helps avoid potential stock overlaps.
Retain Smallcap Fund – Quant AMC
Retain the Smallcap Fund from Quant: Smallcap funds carry high growth potential. Quant AMC’s small-cap management approach has delivered good results. Keeping this fund keeps high-growth exposure intact, while mitigating overlap due to the midcap switch.
Add a Large-Cap Fund for Stability
Include a Large-Cap Fund: Adding a large-cap fund from another AMC will improve stability and consistent returns. Large-cap stocks are typically less volatile and can anchor the portfolio during market downturns.
4. Additional Insights on SIPs in Actively Managed Funds
Actively managed funds are advantageous compared to index funds:

Enhanced Flexibility: Active fund managers adjust allocations to avoid sectors that underperform, unlike index funds.

Adaptive to Market Changes: Active funds adapt to market conditions, which can provide better risk-adjusted returns in the long run.

Certified Financial Planner (CFP) Guidance: Investing through a CFP or MFD brings professional insights, regular updates, and personalised recommendations.

5. Suggested Portfolio Allocation
Here’s a revised allocation for a balanced and diversified portfolio:

HDFC Multicap Fund – Continue with Rs 3,000 SIP for broad diversification.

Midcap Fund – Start a Rs 2,000 SIP for unique midcap exposure and added diversification.

Quant Smallcap Fund – Continue with Rs 1,000 SIP for high-growth potential in small-cap stocks.

Large-Cap Fund – Introduce a Rs 2,000 SIP for stability and consistency with blue-chip stocks.

6. Reviewing Tax Implications on Mutual Fund Returns
Your son’s investments will benefit from the revised mutual fund tax structure. Key points include:

LTCG Tax on Equity Funds: Long-term capital gains above Rs 1.25 lakh are taxed at 12.5%. For SIPs held for over one year, this rule applies.

STCG on Equity Investments: Short-term gains are taxed at 20% if redeemed within a year. Staying invested for the full term (10 years) is tax-efficient.

Debt and Hybrid Fund Taxation: If he chooses to diversify further with debt funds in the future, be aware that gains are taxed as per his income slab, with indexation benefits if held for over three years.

Final Insights
Your son is building a strong foundation for his financial future. By making these changes, he will benefit from enhanced diversification and improved growth potential over time.

Diversification Across AMCs: This brings in varied investment styles, reducing dependency on one AMC’s performance.

Balanced Growth and Stability: A mix of multicap, midcap, smallcap, and large-cap funds ensures growth with stability, aligned to a 10-year horizon.

Ongoing Monitoring: Regularly review the portfolio to ensure it stays aligned with goals. A Certified Financial Planner can provide ongoing guidance.

Encourage him to stay committed, and this strategic approach will help him reach his financial goals confidently.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment