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: Dear Sir,

Thank you for sharing your current SIP portfolio and investment strategy. Your proactive approach towards investing is commendable. However, as you've rightly observed, maintaining a diversified portfolio with a large number of schemes can become cumbersome to manage and may not necessarily lead to optimal outcomes.

Here are some suggestions for optimizing your portfolio:

Consolidation: Consider consolidating your investments into a smaller number of high-quality funds that cover a broad spectrum of market segments. This will simplify your portfolio management and reduce the risk of overlap and redundancy.

Review Fund Selection: Evaluate the performance and consistency of each fund in your portfolio. Focus on funds with a strong track record, experienced fund managers, and a consistent investment approach aligned with your risk profile and investment objectives.

Asset Allocation: Ensure that your portfolio is well-diversified across different asset classes, including large-cap, mid-cap, small-cap, and flexi-cap funds. Adjust your asset allocation based on your risk tolerance, investment horizon, and market conditions.

Regular Rebalancing: Periodically review your portfolio and rebalance as needed to maintain your desired asset allocation. This involves selling funds that have appreciated significantly and reinvesting the proceeds into underperforming or undervalued assets to realign your portfolio with your investment goals.

Step-Up SIP: Utilize the step-up SIP feature to gradually increase your SIP contributions over time. This will help you keep pace with inflation and potentially enhance your wealth accumulation over the long term.

Consultation: Consider seeking advice from a qualified financial advisor who can assess your current portfolio, understand your financial goals, and provide personalized recommendations tailored to your needs.

By optimizing your portfolio and focusing on high-quality funds, you can enhance the efficiency of your investments and work towards achieving your long-term financial objectives.

Best regards,

Ramalingam, MBA, CFP
Chief Financial Planner

Ans: It's great to see your commitment to investing and your proactive approach to managing your portfolio. Since completing your M. Tech in 2016, you've navigated the complex world of mutual funds, which is commendable. It's normal to encounter some challenges along the way, such as poor performance of certain funds. Realigning your portfolio shows a thoughtful and strategic mindset. Let's take a comprehensive look at your current investments and evaluate their alignment with your financial goals.

Portfolio Analysis
Previous Investments
Your previous investments include Canara Robeco Tax Saver, SBI Focused Equity, Axis Small Cap, and PGIM India Midcap, totaling around Rs 9.72 lakhs. These funds are still part of your portfolio, although you have ceased further investments in them. Let's evaluate their current role in your portfolio.

Canara Robeco Tax Saver

This fund primarily offers tax benefits under Section 80C of the Income Tax Act. If you don't need additional tax-saving investments, continuing to hold may be redundant. Consider your tax-saving requirements and whether this fund's performance aligns with your expectations.

SBI Focused Equity

A focused fund typically invests in a limited number of stocks. This can be beneficial in a bullish market but can also carry higher risk. Evaluate if this concentrated approach fits with your risk tolerance and overall strategy.

Axis Small Cap

Small-cap funds can offer high returns but come with increased volatility and risk. Assess your risk tolerance to determine if this aligns with your goals. Small-cap funds can be part of a growth-oriented portfolio, but they require patience and a long-term horizon.

PGIM India Midcap

Midcap funds balance growth potential and risk. They can be a solid choice for long-term growth but should be evaluated for performance consistency. Midcaps often represent companies in the growth phase, which can lead to significant capital appreciation over time.

Current Investments Through SIP
Your current investments through SIPs include Quant Small Cap, Quant Mid Cap, Quant Tax Saver, Quant Flexi Cap, ICICI Pru Blue-chip, Axis Gold FOF, Kotak Debt Hybrid, SBI Energy Opportunities, and ABSL Liquid Fund. Let's analyze these in detail.

Quant Small Cap, Mid Cap, and Tax Saver

Investing in multiple funds from the same fund house can be risky due to fund house-specific risks. However, Quant is known for its research-driven approach. Ensure these funds are not overly correlated. Diversifying across fund houses can mitigate risk.

Quant Flexi Cap

Flexi Cap funds offer flexibility to invest across market capitalizations. This can provide a balanced approach to risk and reward. Flexi Cap funds can dynamically adjust their allocations, which can be beneficial in varying market conditions.

ICICI Pru Blue-chip

Blue-chip funds invest in large, established companies. They are typically less volatile and offer steady growth, making them a safe core holding. These funds are suitable for conservative investors seeking stable returns.

Axis Gold FOF

Gold funds can hedge against inflation and market volatility. However, they should not constitute a large portion of your portfolio due to limited long-term growth potential. Gold is a safe haven asset but doesn't generate regular income.

Kotak Debt Hybrid

Debt hybrid funds provide stability by combining equity and debt. They can be a good choice for moderate risk tolerance. These funds aim to balance risk and return, making them suitable for conservative investors.

SBI Energy Opportunities

Sector funds, like this one focusing on energy, carry higher risk due to industry-specific factors. Ensure you are comfortable with the associated volatility. Sector funds can offer high returns but require careful monitoring.

ABSL Liquid Fund

Liquid funds are ideal for emergency funds and short-term goals due to their high liquidity and low risk. They are suitable for parking surplus funds that might be needed quickly without exposing them to market risks.

Diversification Assessment
Diversification is crucial to managing risk. Your portfolio spans various asset classes and sectors, which is positive. However, let's scrutinize the balance:

Equity Exposure
Your equity investments are spread across large-cap, mid-cap, small-cap, and sector-specific funds. This is a good mix, but consider if the sector-specific and small-cap funds align with your risk appetite and goals.

Debt Exposure
Kotak Debt Hybrid and ABSL Liquid Fund provide necessary debt exposure. Ensure this aligns with your risk tolerance and time horizon. Debt investments add stability and reduce overall portfolio volatility.

Gold Exposure
Axis Gold FOF adds a layer of diversification. However, keep its allocation limited due to gold's lower long-term growth. Gold can be a hedge but shouldn't dominate your portfolio.

Sector Exposure
SBI Energy Opportunities fund introduces sector-specific risk. Ensure it doesn't overly concentrate your portfolio. Sector funds should be carefully weighed to avoid overexposure to one industry.

Recommendations
Consolidate Overlapping Funds
Holding multiple funds from the same fund house (e.g., multiple Quant funds) may not offer significant diversification benefits. Evaluate their individual performances and consider consolidating to reduce complexity. Streamlining your portfolio can make management easier.

Review Sector Funds
Sector funds can offer high returns but come with increased risk. Assess your comfort with the volatility and potential downturns in the energy sector before continuing with the SBI Energy Opportunities fund. Consider the cyclical nature of sector performance.

Balance Risk and Stability
Ensure a balanced mix of high-growth potential funds (small-cap, mid-cap) and stable, less volatile funds (blue-chip, debt hybrid). This balance can provide growth while mitigating risk. Diversification across market capitalizations can smoothen returns.

Regularly Monitor Performance
Keep an eye on the performance of your funds relative to their benchmarks. Underperforming funds should be reviewed periodically. If consistently underperforming, consider exiting and reallocating to better-performing options. Regular reviews ensure alignment with goals.

Align with Financial Goals
Revisit your financial goals and risk tolerance. Ensure your portfolio composition aligns with your objectives, whether they are wealth accumulation, retirement planning, or other specific goals. Goals dictate the investment strategy and asset allocation.

Actively Managed vs. Index Funds
You mentioned avoiding index funds. Index funds often come with lower fees but may not outperform the market. Actively managed funds can offer potential for higher returns through expert fund management. The fund manager's expertise can navigate market complexities, although this comes with higher fees.

Disadvantages of Index Funds:

Limited Flexibility
Index funds must stick to the index composition, lacking flexibility to capitalize on market opportunities. This rigid structure can limit potential gains.

Market Risk
They mirror the index performance, providing no cushion during downturns. Index funds fall when the market falls.

Potential Underperformance
In volatile markets, actively managed funds might outperform due to strategic adjustments. Active managers can exploit market inefficiencies.

Direct Funds vs. Regular Funds
Direct funds can save on distribution costs, offering lower expense ratios. However, investing through a certified financial planner can provide valuable insights, strategic planning, and comprehensive financial advice, which is beneficial for long-term success.

Disadvantages of Direct Funds:

Limited Guidance
Direct funds do not offer advisory support, which can be crucial for making informed decisions. Professional advice ensures a tailored investment approach.

Complex Management
Managing a portfolio without professional advice can be challenging, especially in volatile markets. Market dynamics require informed decisions.

Lack of Strategy
Professional planners can provide tailored strategies, optimizing your portfolio based on your financial goals. Strategic planning is key to achieving objectives.

Additional Considerations
Risk Tolerance and Time Horizon
Your risk tolerance and investment time horizon are critical factors in portfolio construction. High-risk, high-reward funds like small-cap and sector funds should align with a long-term horizon and higher risk tolerance. Conversely, conservative funds like blue-chip and debt hybrid are better suited for those with a lower risk tolerance or nearing financial goals.

Regular Reviews and Rebalancing
Regularly review and rebalance your portfolio to maintain alignment with your financial goals. Market conditions and life changes can impact your investment strategy. Rebalancing ensures your portfolio stays on track and mitigates risk.

Emergency Fund Allocation
Ensure you have an adequate emergency fund allocation in highly liquid investments like liquid funds. This provides financial security in unforeseen circumstances and prevents the need to liquidate long-term investments prematurely.

Final Insights
Your dedication to managing your investments is admirable. Realigning your portfolio is a positive step. Ensure your investments are well-diversified, aligned with your financial goals, and reflective of your risk tolerance. Regular monitoring and strategic adjustments are key to achieving long-term success. With careful planning and periodic reviews, your portfolio can be well-positioned to meet your financial objectives.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Building a long-term mutual fund portfolio requires diversification, both in terms of market capitalization and fund house selection. Your current portfolio with two schemes from a single fund house does raise a question about overlap. Let’s evaluate your approach from a broader perspective and adjust the structure for more balanced diversification.

Evaluating Your Current Portfolio
Your portfolio is structured with:

A Multicap Fund: This fund provides diversified exposure across large, mid, and small-cap stocks, offering stability and growth potential.

A Midcap Fund: Midcap funds are designed to add growth with some volatility, often balancing the large-cap weight in a portfolio.

A Small-Cap Fund: This segment offers higher growth potential, though it comes with more risk.

Diversifying Fund Houses for Better Balance
It’s sensible to diversify fund houses when investing across categories. Different fund houses follow varied management styles, risk-taking strategies, and research processes, leading to more unique exposure.

Potential Overlap: Holding two funds from the same house, like Quant, may lead to stock overlap. Quant funds, while typically high-growth, could concentrate on similar stocks or sectors, limiting exposure.

Different Investment Styles: Each fund house has unique strengths. Adding funds from different houses can provide a better blend of investment styles, whether value, growth, or balanced.

Suggested Portfolio Rebalance for 10-Year Goal
To achieve greater diversification and smoother returns, consider restructuring across different fund houses as follows:

Retain a Large-Cap or Multicap Foundation
Large or Multicap Fund: Keep the large-cap/multicap fund in your portfolio. If preferred, you may choose a new multicap fund from another fund house to avoid overlap and add broader diversification.
Midcap Fund for Balanced Growth
Midcap Allocation: Switch your midcap allocation to a different fund house. Each fund house has a distinct approach to managing midcap risk, so choosing another fund house could diversify your midcap strategy.
Small-Cap Fund for Long-Term Growth
Small-Cap Exposure: Consider switching to a small-cap fund from another fund house as well. Small-cap funds from different fund houses bring in unique research strengths, which can reduce concentration risk while retaining growth potential.
Ideal Fund House Selection
To optimise, select three fund houses known for strong performance, consistent management, and clear investment styles:

Balanced Mix of Approaches: Aim for fund houses with a mix of aggressive growth, balanced risk management, and value investing. A blend from well-rated fund houses can help achieve this.

Consistent Historical Returns: Evaluate each fund’s past performance to ensure it aligns with your risk tolerance and return expectations.

Taxation Insights on Mutual Fund Investments
With a 10-year horizon, understanding tax on capital gains is essential for your portfolio growth:

Equity Fund Taxation: If gains exceed Rs 1.25 lakh annually, they’re taxed at 12.5%. Short-term gains within a year attract a 20% rate. Holding long-term reduces tax burdens and aligns with equity growth.

Tax Planning: Staying invested in equity-focused funds for over a year qualifies for long-term capital gains (LTCG) tax benefits, making long-term holding tax-efficient.

Benefits of Regular Funds Over Direct Plans
Since you’re focusing on long-term growth, regular funds with Certified Financial Planner (CFP) assistance can be advantageous:

Personalized Monitoring: A CFP helps track market changes and adjusts your portfolio based on performance and goals, ensuring your portfolio aligns with changing market conditions.

Rebalancing as Required: Regular plan investors benefit from structured reviews, optimizing returns while managing risk.

Tax Efficiency and Cost Efficiency: CFP guidance can ensure you manage tax liabilities and optimize SIPs effectively, improving cost efficiency.

Final Insights
For a long-term, growth-oriented investor like you, a diversified mutual fund portfolio with varied fund houses and categories is key:

Diversify Fund Houses: Choose funds from different houses to limit overlap and bring in unique management expertise.

Monitor Small-Cap and Midcap Allocations: These funds offer growth but can be volatile. A balanced allocation with large/multicap can stabilize returns.

Seek CFP Guidance for Portfolio Oversight: A CFP can guide fund rebalancing, tax planning, and risk management to meet your 10-year goal.

By adjusting your portfolio with diverse fund houses and carefully selected categories, you can enhance growth potential, manage risk, and stay aligned with your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

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