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New to Mutual Funds: What are the Best Funds for My Goals?

Ramalingam Kalirajan |10872 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jan 27, 2025

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

Question by Saravanan on Jan 27, 2025Hindi

Below is the portfolio for all my goals. I am 46 years old, moderate risk taker and new to mutual funds. Kindly review and conclude, if the below portfolio is fine to proceed and suggest me if any modifications is required. Portfolio - Daughter's Marriage and Son's Education, Time Horizon: 7 years 45% Nippon India Nifty 50 index Fund 15% Kotak Nifty next 50 index fund 15% Parag Parikh Flexi cap fund 25% Axis Corporate Bond fund Portfolio - Retirement, Time Horizon: 10 years, planning to introduce debt at the start of 6th year, thus by reducing equity every year. 55% Nippon India Nifty 50 index Fund 15% Kotak Nifty next 50 index fund 15% Motilal Oswal Nifty Midcap 150 Index fund 15% Parag Parikh Flexi cap fund Portfolio - Buying car/Wealth Creation, Time Horizon: 7 years 50% Nippon India Nifty 50 index Fund 30% Mirae asset aggressive hybrid fund 20% ICICI Prudential Corporate Bond fund Direct plan Growth

Ans: You have created a goal-based portfolio with clear time horizons and objectives. Your focus on mutual funds is a good step, but a few changes can improve efficiency and alignment with your goals. Below is a detailed assessment of your portfolios along with recommendations.

General Observations
Your allocation demonstrates clarity and a structured approach.

The presence of equity, debt, and hybrid funds ensures a balanced risk-return ratio.

However, index funds dominate the portfolio. Actively managed funds could enhance returns for long-term goals.

Introduction of direct plans indicates cost-consciousness, but regular plans with MFD guidance may offer personalised benefits.

Portfolio: Daughter's Marriage and Son's Education
Time Horizon: 7 years

Current Allocation:

45% in a Nifty 50 index fund.

15% in a Nifty Next 50 index fund.

15% in a flexi-cap fund.

25% in a corporate bond fund.

Observations:
A 60% allocation to index funds reduces potential for excess returns.

Index funds lack active management and struggle in volatile markets.

A flexi-cap fund adds diversification but needs a higher allocation.

The corporate bond fund ensures stability but may need a dynamic bond fund for better yields.

Recommendations:
Reduce index fund allocation to 30%.

Allocate 30% to flexi-cap funds for higher long-term growth.

Keep 25% in corporate bond funds. Consider dynamic bond funds for better returns.

Add 15% in a balanced advantage or hybrid fund for stability.

Portfolio: Retirement
Time Horizon: 10 years (Shifting to debt from 6th year)

Current Allocation:

55% in a Nifty 50 index fund.

15% in a Nifty Next 50 index fund.

15% in a mid-cap index fund.

15% in a flexi-cap fund.

Observations:
Index funds dominate 70% of the portfolio, limiting active opportunities.

Mid-cap exposure enhances growth but carries higher risk.

Transitioning to debt from the 6th year is a sound strategy.

Recommendations:
Reduce index funds to 40%. Allocate this to a mix of large-cap and flexi-cap funds.

Increase flexi-cap funds from 15% to 30% for better returns.

Keep 15% in mid-cap funds for growth potential.

From the 6th year, add short-duration debt funds and balanced advantage funds.

Ensure regular reviews to rebalance equity and debt exposure.

Portfolio: Buying Car/Wealth Creation
Time Horizon: 7 years

Current Allocation:

50% in a Nifty 50 index fund.

30% in an aggressive hybrid fund.

20% in a corporate bond fund.

Observations:
The 50% allocation to index funds could limit wealth creation potential.

Aggressive hybrid funds balance risk and growth but may require diversification.

Corporate bond funds are stable but could be supplemented with higher-yielding instruments.

Recommendations:
Reduce index fund allocation to 30%.

Increase allocation to aggressive hybrid funds to 40%.

Replace 20% corporate bond allocation with dynamic or medium-duration debt funds.

Add 10% in a multi-asset fund for further diversification.

Analytical Perspective: Index Funds vs Actively Managed Funds
Index Funds: Passive funds with lower costs but limited returns in volatile or bearish markets.

Actively Managed Funds: Outperform during economic cycles with professional fund manager expertise.

Actively managed funds can help maximise returns in your portfolios.

Investing via MFD ensures periodic reviews and customised advice.

Disadvantages of Direct Plans
Direct plans may reduce costs, but lack personalised guidance.

MFDs with CFP credentials align funds with your goals and monitor performance.

Regular plans save time and effort while offering expert insights.

Taxation Impact
Equity LTCG above Rs. 1.25 lakh is taxed at 12.5%.

STCG on equity funds is taxed at 20%.

Debt funds are taxed as per your income tax slab.

A Certified Financial Planner can help manage tax implications efficiently.

Key Suggestions Across All Portfolios
Diversify across active equity and hybrid funds to optimise returns.

Reduce heavy reliance on index funds for long-term goals.

Use dynamic and medium-term debt funds for stability in debt allocation.

Review portfolios yearly and rebalance as required.

Final Insights
Your portfolios have a strong foundation for achieving your goals. A few adjustments can further optimise performance. Balancing active and passive funds, diversifying instruments, and considering expert guidance will help you achieve financial success.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Asked on - Jan 31, 2025 | Answered on Feb 01, 2025

Sir, thanks for your advice. I have below questions: 1. For retirement goal, you have mentioned as below - "Reduce index funds to 40%. Allocate this to a mix of large-cap and flexi-cap funds. Increase flexi-cap funds from 15% to 30% for better returns. Keep 15% in mid-cap funds for growth potential." But if I add 40% in index funds (nifty 50 and nifty next 50), 30% to flexi cap and 15% to midcap, the total allocation is coming around to 85%, what about the remaining 15%? 2. Since I am new to mutual funds, I have allocated small amounts to active funds, as I have fear over the long term on how it will perform and fund manager issues. But you have asked to increase 30% to flexi cap and 40% to hybrid funds, Will it have high risk, as I am a moderate risk taker and how about for my goals of 7 years and 10 years? Is it worth to increase the allocation to active funds by decreasing the allocation on index funds? 3. You asked me to diversify among debt funds instead of single corporate bond fund, I want to keep my portfolio very simple with max of 3 to 4 funds, so that it will be easy to rebalance every year. Kindly suggest as having multiple funds will increase expense ratio as well?

Ans: Retirement Portfolio Allocation
You are correct in pointing out the missing 15%. That portion should be allocated to a balanced advantage or dynamic asset allocation fund. This will provide an automatic equity-debt rebalancing mechanism and reduce volatility as you approach retirement.

Active Funds vs. Index Funds for a Moderate Risk Taker

Index funds offer stability but may underperform in certain market conditions.

Actively managed funds, particularly flexi-cap and hybrid funds, provide professional fund management and potential outperformance.

A 7- to 10-year horizon allows active funds to navigate different market cycles.

Flexi-cap funds provide diversification across market caps, reducing the risk of fund manager bias.

Hybrid funds manage volatility, making them suitable for a moderate risk taker.

Keeping some allocation in index funds for predictability while increasing active fund exposure ensures better risk-adjusted returns.

Keeping the Portfolio Simple with Fewer Debt Funds

You can simplify the debt portion by choosing a dynamic bond fund instead of multiple debt categories.
A balanced advantage fund also manages equity-debt allocation dynamically, reducing the need for separate debt funds.
This keeps the portfolio easy to manage while ensuring proper diversification.
Expense ratios remain manageable with this approach.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Asked on - Feb 12, 2025 | Answered on Feb 14, 2025

Sir, you have mentioned this in the first update. Reduce index fund allocation to 30% (Portfolio: Buying Car/Wealth Creation). Reduce index fund allocation to 40% (Portfolio: Retirement). This indicates the index allocation on nifty 50 index fund or nifty next 50 index fund or both? Kindly clarify.

Ans: The reduction in index fund allocation applies to the total index exposure, including both Nifty 50 and Nifty Next 50. You can decide how to split the reduced allocation between them based on your preference. If you prefer more stability, keep a higher portion in Nifty 50. If you seek slightly higher growth, retain more in Nifty Next 50. Balancing both ensures diversification within index investments.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

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