Need Expert Advice?Our Gurus Can Help

Ramalingam Kalirajan |10872 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 05, 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 Anonymous on Aug 05, 2025Hindi

My current portfolio, which feels safe and diversified, is actually costing me a fortune in hidden fees. I'm 30 and have a 25-year time horizon. My current investments are mostly in actively managed large-cap and mid-cap mutual funds from popular AMCs, with an average expense ratio of 1.5 per cent to 2.2 per cent. I just found out about the benefits of index funds and ETFs. How can I strategically rebalance my investments and find low-cost alternatives, like a Nifty 50 Index Fund, to ensure a much larger retirement corpus without taking on excessive risk or incurring significant tax liabilities during the transition?

Ans: You’ve taken a strong first step by identifying hidden costs in your portfolio.
You also understand the long-term power of compounding.
At 30, your 25-year horizon gives you a strong growth edge.
You’re not just chasing returns—you want cost-efficiency with low risk.
That is a responsible and long-term focused approach.

Let us now study your current approach, what’s working, what’s hurting,
and how to shift without disrupting returns or inviting tax burdens.

» Current Portfolio Reflection

– You hold actively managed large and mid-cap mutual funds.
– Average expense ratio is between 1.5% and 2.2%.
– These funds belong to well-known asset management companies.
– The mix may seem diversified and growth-oriented.
– But high cost compounds and reduces net returns yearly.
– Over 25 years, this expense eats into a large corpus chunk.

» Expense Ratio Alone Should Not Decide Fund Choice

– A lower expense ratio looks attractive, but it’s not everything.
– High-performing funds often justify higher costs through alpha.
– Alpha is return above benchmark after all charges.
– Some active funds consistently beat indices, even after cost.
– Expense must be judged along with risk-adjusted returns.
– Many low-cost funds underperform due to poor strategy or passive nature.

» Understand the Risks of Index Funds and ETFs

– Index funds only copy the benchmark portfolio like Nifty 50.
– They lack active strategy, risk controls, and insight.
– No outperformance goal exists, just mirror the index returns.
– In falling markets, index funds fall fully with no downside protection.
– They also carry concentration risk in a few top-weighted stocks.
– No flexibility to exit overvalued sectors or weak stocks.
– ETFs may offer liquidity but are not ideal for long-term SIPs.

» Why Actively Managed Funds Still Make Sense

– Active funds aim to outperform their benchmarks.
– Experienced fund managers take informed decisions.
– They rebalance, rotate sectors, and reduce downside impact.
– This flexibility helps protect returns during volatile years.
– Good mid-cap or flexi-cap funds outperform index funds over 10+ years.
– Your long horizon gives space for active strategies to work.
– Tax efficiency of funds held for long term adds to benefit.

» Index Funds Seem Cheaper But May Deliver Lower Wealth

– 0.2% vs 1.8% expense difference looks huge over decades.
– But lower cost is useless if return is lower too.
– Active funds that generate even 1.5% extra beat index funds.
– Over 25 years, this extra return compounds into crores.
– Hence, do not shift solely for low cost benefit.
– You might save fees, but lose opportunity to build more wealth.

» Avoid Sudden Portfolio Overhaul

– Shifting all investments at once can trigger capital gains tax.
– Short-term capital gains taxed at 20%.
– Long-term gains above Rs. 1.25 lakh taxed at 12.5%.
– Sudden exit also breaks compounding momentum.
– Instead, make slow, planned rebalancing.

» Use Fresh Investments for Portfolio Correction

– Continue old holdings in active funds if performance is decent.
– Use fresh SIPs in better performing active funds with lower cost.
– Choose regular plan with a CFP-guided MFD channel.
– Avoid direct plans even if they seem cost-saving.

» Why Regular Plans via MFD + CFP Are Better Than Direct Plans

– Direct plans give no personal guidance or handholding.
– Wrong asset allocation or fund switch may hurt your corpus.
– Market timing or greed-fear cycle leads to emotional decisions.
– A Certified Financial Planner tracks your long-term goal regularly.
– Through MFD platform, you get timely rebalancing, reviews, and tax alerts.
– Regular plans charge a small fee, but add large value.

» Strategic Rebalancing Without Excessive Tax Impact

– Do not redeem all old funds at once.
– First check which ones are underperforming or outdated.
– Exit those with small capital gains first.
– Carry forward losses (if any) to offset gains.
– If taxed amount is beyond Rs. 1.25 lakh LTCG, split redemptions across years.
– Invest redemption amount slowly via STP into new funds.
– This keeps risk low and tax impact manageable.

» Ideal Investment Mix for Your Profile

– You’re 30 years old with 25 years to go.
– Your portfolio can hold 75–80% equity allocation.
– Within that, mix large-cap, mid-cap, and flexi-cap actively managed funds.
– Avoid thematic, small-cap, or sector-specific funds for now.
– Keep 20–25% in short-term debt or hybrid funds for balance.
– This gives both growth and risk absorption.

» Equity Fund Categories to Focus On

– Large-cap active funds with low expense and consistent outperformance.
– Flexi-cap funds that switch across market caps when needed.
– Mid-cap funds with good downside protection and proven managers.
– Keep SIPs running in 3–4 carefully chosen funds across these categories.
– Do not exceed 6–7 funds total, or tracking becomes difficult.

» Rebalance Once a Year With Guidance

– Review once a year if allocation has drifted.
– Exit funds that underperform for 3–4 years in a row.
– Check overlap between funds to avoid duplication.
– Use MFD and CFP inputs before shifting anything.
– Rebalancing helps you stay on track with risk and returns.

» Use SIPs to Build Wealth Efficiently

– SIPs benefit from rupee cost averaging.
– You buy more units when prices are low.
– This smooths volatility and boosts long-term returns.
– Monthly SIPs also help control emotional investment errors.
– Choose SIP amounts based on income, goals, and risk appetite.

» Maintain Emergency and Goal-Specific Funds Separately

– Keep 6–12 months of expenses in liquid or ultra-short funds.
– This prevents panic selling during market dips.
– Also keep separate short-term goal funds outside retirement corpus.
– This protects your long-term investment engine from frequent withdrawals.

» Automate Investments But Stay Alert

– Set auto-debits for SIPs, but don’t ignore performance.
– Track fund performance every 6–12 months.
– Keep an eye on category average returns.
– Make changes only after 3-year consistent underperformance.
– Do not switch for temporary short-term reasons.

» Stay Invested Through Market Cycles

– Long-term investing means staying during highs and lows.
– Do not stop SIPs during corrections or bad news.
– Those times often give best entry opportunities.
– Discipline builds the real retirement corpus, not prediction.

» Avoid ULIPs, LIC Endowment, and Insurance-Linked Products

– These mix insurance and investment poorly.
– They have lock-ins, low transparency, and poor return.
– If you hold any such policies, consider surrendering now.
– Reinvest the proceeds in mutual funds after tax consideration.

» Consider Adding International Equity Funds Later

– Once Indian equity allocation is strong, consider global exposure.
– Around 10–15% in international funds gives diversification.
– Choose funds with global large-cap exposure only.
– Avoid thematic or country-specific ones.

» Retirement Planning Needs Ongoing Review

– Life changes, incomes rise, expenses shift.
– Keep reviewing your retirement strategy every 2–3 years.
– Reassess target corpus based on inflation and lifestyle.
– Make sure the portfolio reflects new needs.
– Use financial planning tools from your MFD or CFP.

» Finally

– Don’t fall for the index fund hype blindly.
– Low cost doesn’t always mean better wealth outcome.
– Active funds with good management beat passive options over long term.
– Don’t chase low expense—chase better returns with smart risk control.
– Avoid direct plans that leave you without guidance.
– Use professional support to build a Rs. 5–10 crore retirement fund.
– Rebalance smartly, avoid tax shocks, and let compounding work.
– You are young, disciplined, and on the right path.
– With the right corrections, your retirement dream is safe.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.