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38-year-old earning 125k monthly with 7 lakh in MF & 6 lakh in stocks, is this portfolio diversified?

Ramalingam Kalirajan |7363 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Dec 27, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Dec 20, 2024Hindi

Dear Sir I am 38 years old with monthly salary around 125k, doing Sip since last year, my current Sip is 57k per month as below, 10k - SBI Nifty 50 index 3k - Motilal oswal Nsdaq 100 FOF 5K - DSP Nifty next 50 index 4k - Nippon india small cap 5k - Motilal oswal mid cap 3.5k - Quant mid cap 7k - ICICI bluechip 3.5k Mirae Asset large cap 3.5k - Parag parikh flexicap 4.5k - Canara robeco emerging equity 3k - HDFC multicap 3k - ICICI manufacturing fund 2k - ICICI Bharat 22 FOF Current mutual fund portfolio is 7 Lakh and 6 Lakhs are invested in direct stocks, also I have incresed my EPF to 100%.. All are direct fund. Could you please check and suggest if I have done over diversification and which funds might be overlapping, also which fund I need to leave and stay....I have long term horizon of 20+ years

Ans: Your monthly SIP of Rs. 57,000 is commendable, and you have a good mix of equity and sector-specific funds in your portfolio. However, there seems to be some overlap, which could result in over-diversification. This might not yield the best results, as too many similar funds could dilute the overall performance. With your long-term horizon of 20+ years, it's essential to streamline your investments for maximum growth potential. Let’s go through the key points to evaluate your current portfolio.

Over-Diversification Assessment
You have invested in a mix of large-cap, mid-cap, small-cap, thematic, and index funds, which covers a wide spectrum of the market. However, you need to assess if all these funds are truly adding unique value or if some funds are too similar. Here’s the breakdown:

Index Funds: You are investing in two index funds (SBI Nifty 50 and DSP Nifty Next 50). While index funds provide broad market exposure, they often overlap in terms of the stocks they hold. Both Nifty 50 and Nifty Next 50 index funds will hold many of the same stocks, with the latter focusing on mid-cap stocks. You might want to consider keeping just one index fund, preferably the Nifty 50 if you're looking for stability and consistency, or explore actively managed large-cap funds for better long-term potential.

Mid-Cap Funds: You have multiple mid-cap funds, including Motilal Oswal Mid Cap, Quant Mid Cap, and HDFC Multicap. There is potential overlap here as mid-cap funds usually have a similar set of stocks, and investing in more than one may not provide much additional diversification. It might be beneficial to reduce this overlap by choosing one well-performing mid-cap fund rather than spreading your investments across several.

Small-Cap Funds: Your small-cap exposure is through Nippon India Small Cap. Small-cap funds are inherently more volatile but offer high growth potential. As this is a high-risk category, it’s advisable to have a limited exposure (typically 5-10%) to small-cap funds in your overall portfolio.

Large-Cap Funds: You are invested in ICICI Bluechip, Mirae Asset Large Cap, and Parag Parikh Flexi Cap. All of these funds focus on large-cap stocks, but Parag Parikh Flexi Cap also invests in mid-cap and international stocks, giving it a broader diversification. You might want to consider consolidating this exposure, as having multiple large-cap funds can lead to a lot of redundancy.

Thematic and Sector-Specific Funds: You have investments in ICICI Manufacturing Fund and ICICI Bharat 22 FOF. These are thematic and sector-specific funds. While these funds provide unique sectoral exposure, the manufacturing sector fund might overlap with some of the stocks in your other funds. Sector funds tend to be more volatile, so their role in your portfolio should be limited and well-thought-out.

Suggested Actions
Reduce Overlapping Funds:

Consider eliminating one of the mid-cap funds (Motilal Oswal Mid Cap or Quant Mid Cap) to reduce redundancy.
Keep only one index fund (either SBI Nifty 50 or DSP Nifty Next 50), as both are highly correlated.
Keep your small-cap exposure limited to one fund, as small-cap stocks are highly volatile and should be approached with caution.
Increase Exposure to Actively Managed Funds:
Actively managed funds typically offer better risk-adjusted returns over the long term, as fund managers can select stocks based on research and market conditions. While index funds have their place, especially for broad market exposure, actively managed funds tend to outperform in the long run if selected carefully.

Streamline Large-Cap Funds:
Consider consolidating your large-cap exposure by selecting one or two of the better-performing funds, rather than having multiple overlapping funds in this category. Given that Parag Parikh Flexi Cap already includes large-cap stocks, you could reduce exposure in the other large-cap funds.

Sectoral Exposure:
Thematic and sector funds like ICICI Manufacturing Fund can add value, but they should not dominate your portfolio. The manufacturing sector may face challenges depending on economic cycles, so it's essential to limit such exposure to a small percentage of your overall portfolio.

Understanding Direct Funds vs Regular Funds
Since you are investing in direct funds, it's essential to note that while they may seem appealing due to lower expense ratios, direct funds come with higher risk for individual investors. They require a deep understanding of the market and may lead to poor choices due to lack of expertise or overtrading. Direct funds also lack the regular monitoring and professional management that comes with investing through a mutual fund distributor.

Opting for regular funds, where a Certified Financial Planner (CFP) assists you, could be a better strategy, especially for building a diversified portfolio. A CFP can evaluate your risk tolerance, time horizon, and financial goals to ensure that your investments are properly aligned with your long-term needs. Moreover, regular funds can often provide better insights into market conditions, making it easier to navigate your investment strategy.

Final Insights
Given your long-term investment horizon, it's crucial to focus on creating a streamlined portfolio that maximizes growth potential without spreading yourself too thin. You have a solid mix of fund types, but reducing overlap will improve focus and efficiency. It’s also worth considering consolidating into actively managed funds, which can provide higher returns over time, especially with a 20+ year horizon. Additionally, make sure to evaluate the performance of each fund periodically and make adjustments as needed.

By following a more focused approach, you’ll have a portfolio that offers strong growth potential with controlled risk exposure. With proper diversification and strategic fund selection, your investments will be more aligned with your long-term goals of wealth creation.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

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

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