Dear Sir, I have another question: I have been investing in the Bajaj Allianz Life Goal Assurance Plan for the past five years, which is a combination of insurance and investment. The total premium payment duration is 10 years, with a SIP of ?10,000 per month, followed by a lock-in period of an additional 5 years So far, my monthly contributions of ?10,000 have grown to ?9.40 lakhs, with an approximate CAGR of 16%, although the insurance coverage remains at ?12 lakhs. Initially, I did not have much knowledge but continued investing due to the plan’s market-linked structure. For the first five years, my funds were allocated to Pure Stock II and Equity Growth funds basically large-cap. Recently, mid-cap and small-cap index funds were also added to their portfolio. Now that I’ve completed 5 years of investing in large-cap components, I am considering allocating the remaining 5 years to mid-cap and small-cap funds, without increasing the SIP. This would be done through a fund switch from large-cap to mid-cap and small-cap or by dividing the allocation equally—25% each across pure-stock, equity growth, mid-cap, and small-cap funds. Would you recommend this strategy while allowing the large-cap corpurs from the first 5 years to grow at their own pace and remaining 5 years switched into mid-cap/small-cap. Since the policy will mature in 2034, this gives me ample time for the investment to grow, allowing the corpus to build significantly over the remaining years

Ans: Insurance products should be used for protection and not investment. A term insurance plan and investment via Mutual Funds are better for wealth creation compared to investment via insurance products.

Ans: It’s great to see you’ve stayed consistent with your investments over the past five years. Your current strategy has already delivered an impressive CAGR of around 16%. This indicates that your investment in large-cap components has performed well.

Your decision to consider diversifying into mid-cap and small-cap funds shows good insight, especially since the policy matures in 2034. This gives you ample time to ride out market fluctuations and benefit from potential growth.

Let’s assess your plan step by step.

Maintaining Large-Cap Investments
Steady Growth Potential: Large-cap funds are known for stability and relatively lower risk. Since your large-cap investments have done well, letting them grow further without switching out entirely is a wise move. Large-caps often provide steady growth over time, even in volatile markets.

Balanced Risk: As you’ve already allocated five years to large-cap funds, you have a solid base that carries lower risk compared to mid-cap or small-cap funds.

Mid-Cap and Small-Cap Fund Allocation
Potential for Higher Growth: Mid-cap and small-cap funds generally offer higher growth potential but come with increased volatility. Given that you have another 10 years for the policy to mature, adding these funds now could give you enough time to capture the potential upside of these categories.

Diversification Across Market Segments: By allocating the remaining five years to mid-cap and small-cap funds, you’re essentially diversifying across different market segments. This could help in balancing your overall risk, while providing higher growth opportunities compared to sticking only with large-cap funds.

Fund Switching Strategy: Switching some of your existing large-cap corpus into mid-cap and small-cap might reduce the stability of your portfolio. Instead, continuing with the large-cap corpus and allocating future premiums to mid-cap and small-cap funds may provide a more balanced approach.

Suggested Allocation Strategy
Divide Equally Across Funds: Splitting your contributions equally among large-cap, mid-cap, and small-cap funds seems like a balanced approach. You’ve mentioned an allocation of 25% each across pure-stock, equity growth, mid-cap, and small-cap funds. This could help in spreading out your risk while still allowing for growth opportunities.

Stay Consistent: Continuing with a steady SIP of Rs. 10,000 without increasing the amount for now is a good plan. Since you are already seeing good returns, consistency over time will be key to building your corpus further.

Evaluating Your Insurance Component
Insurance Coverage: Your current insurance coverage stands at Rs. 12 lakhs. Considering the policy is a combination of investment and insurance, it’s essential to evaluate if the coverage is adequate for your needs. Life insurance should primarily serve to protect your family, and if this amount falls short of your requirements, consider supplementing it with a term insurance plan.

Lock-in Period: Since there is an additional lock-in period of five years post the premium payment term, switching funds now and letting them grow for the next decade could be beneficial. You have ample time to ride out any short-term market volatility in the mid-cap and small-cap space.

Reviewing Your Fund Choices
Actively Managed Funds vs Index Funds: You’ve mentioned that your funds are market-linked, with some exposure to index funds. While index funds are often lower-cost options, actively managed funds can outperform them over time, especially in mid-cap and small-cap categories. Actively managed funds benefit from professional fund managers who can make strategic choices in response to market conditions, unlike passive index funds that simply track the market.

Switching to Actively Managed Funds: If a portion of your investments is in index funds, consider switching to actively managed mid-cap and small-cap funds. This will provide you with the advantage of professional management, especially in more volatile sectors like mid-caps and small-caps.

Final Insights
Long-Term Horizon: Your 10-year remaining investment window provides a good time horizon to take on the moderate risk associated with mid-cap and small-cap funds. However, always review your portfolio performance periodically to ensure it aligns with your long-term financial goals.

Balance Risk and Reward: By keeping your existing large-cap investments and diversifying into mid-cap and small-cap funds, you are effectively balancing risk with the potential for higher returns.

Insurance vs Investment: Review your insurance needs separately from your investment strategy. If the Rs. 12 lakh insurance coverage is insufficient, it’s advisable to take additional term insurance that provides higher coverage at a low cost.

It’s important to continue monitoring the performance of each fund and adjust the allocation if needed.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in