My father is a 65 years old retired person who used to trade in market with the help of a broker and invest in MFs also. But he was forced to quit investing and withdraw all money to meet some tough and critical family concerns. Now he has around 2.75 lakhs to invest for creating as much money as possible. My question of behalf of him is - are an aggressive hybrid funds, an LC-MC funds and a high risk flexi cap fund having high beta and sharpe good to go for his purpose?

Ans:

Equity - Small Cap Fund & Debt - Credit Risk Fund are high-risk categories.

Hybrid - Balanced Advantage are under:

1. ICICI Prudential Balanced Advantage Fund - Growth
2. Nippon India Balanced Advantage Fund - Growth

Ans: You’ve wisely accumulated a significant corpus of Rs 60-70 lakhs. Now, you want to ensure this money continues to grow, provides inflation-beating returns, and does so with minimal risk. Your goal of achieving 9-10% returns in the short term, while aiming for better returns in the long term, is reasonable. As a retired person, maintaining a balance between growth and safety is crucial.

Let’s delve into your questions to help craft a suitable investment strategy.

Should You Invest Entirely in Mutual Funds?
Mutual funds offer diversification, professional management, and potential for good returns. Given your situation, investing the entire corpus in mutual funds could be a prudent move. However, balancing between equity and hybrid funds can help manage risks effectively.

1. Balancing Risk and Returns
Large-Cap Funds: These invest in well-established companies, offering stability with moderate growth. They are suitable for conservative investors seeking steady returns.

Multi-Cap Funds: These invest across companies of various sizes. They offer a mix of stability and growth potential, ideal for those with a balanced risk appetite.

Balanced or Hybrid Funds: These funds invest in a mix of equities and debt instruments. They offer a buffer against market volatility, making them suitable for retired investors like you.

Given your age and goals, a balanced approach with a mix of equity and hybrid funds seems appropriate. This can provide the growth you seek while managing risk.

Direct Equities vs. Mutual Funds
Investing directly in equities can offer higher returns, but it comes with higher risks. As a retired person, your focus should be on preserving capital while achieving reasonable growth.

1. Benefits of Mutual Funds Over Direct Equities
Professional Management: Mutual funds are managed by professionals who make informed decisions, reducing the risk of poor stock selection.

Diversification: Mutual funds spread investments across various sectors and companies, reducing the impact of any single stock's performance.

Convenience: Mutual funds require less time and expertise compared to managing a direct equity portfolio.

For someone in your position, relying on mutual funds instead of direct equities offers a safer, more convenient way to achieve your financial goals.

Ideal Portfolio Mix for You
Considering your objectives, here’s a suggested portfolio mix that balances risk and returns:

1. Large-Cap Funds (30-35% of Corpus)
Stability with Growth: Large-cap funds provide steady growth with relatively low risk. They invest in well-established companies that are less volatile.

Inflation-Beating Returns: These funds typically offer returns that outpace inflation, which is crucial for preserving your purchasing power.

Suggested Allocation: Invest Rs 18-24 lakhs in large-cap funds. This will form the stable core of your portfolio.

2. Multi-Cap or Flexi-Cap Funds (25-30% of Corpus)
Balanced Growth: Multi-cap funds offer a mix of large, mid, and small-cap stocks. They provide a balance between stability and higher growth potential.

Market Opportunities: These funds can adjust based on market conditions, allowing fund managers to capitalize on growth opportunities.

Suggested Allocation: Invest Rs 15-21 lakhs in multi-cap or flexi-cap funds. This provides a balanced approach to growth.

3. Balanced or Hybrid Funds (35-40% of Corpus)
Risk Mitigation: Balanced funds reduce risk by combining equity and debt investments. They provide a cushion during market downturns.

Steady Returns: These funds are designed to offer moderate returns with lower risk, ideal for retirees.

Suggested Allocation: Invest Rs 21-28 lakhs in balanced or hybrid funds. This ensures your portfolio has a solid defense against volatility.

Alternatives to Consider
If you prefer not to invest entirely in mutual funds, there are other options to explore. These alternatives can provide additional safety or income streams.

1. Debt Funds
Low Risk: Debt funds invest in fixed-income securities like bonds, offering lower risk compared to equities.

Moderate Returns: While returns are lower than equity funds, they still beat traditional FDs, making them a safer alternative.

Suggested Allocation: If you prefer less exposure to equities, consider allocating 20-30% of your corpus to debt funds. This would provide a stable, low-risk component to your portfolio.

2. Senior Citizen Savings Scheme (SCSS)
Safe and Secure: SCSS is a government-backed scheme offering regular income with safety of capital.

Attractive Interest Rates: The interest rates are higher than regular FDs, and they are also tax-efficient under Section 80C.

Suggested Allocation: If safety is your primary concern, you could allocate 10-20% of your corpus to SCSS. This will provide regular income and peace of mind.

Final Insights
Your investment strategy should reflect your risk tolerance, financial goals, and retirement needs. Given your situation, here’s a recap of the suggested approach:

Invest 30-35% in large-cap funds for stability and steady growth.

Allocate 25-30% to multi-cap or flexi-cap funds for balanced growth.

Place 35-40% in balanced or hybrid funds to manage risk and ensure moderate returns.

Consider debt funds and SCSS as safer alternatives if you prefer less equity exposure.

This diversified portfolio is designed to achieve your desired 9-10% returns while managing risk effectively. It offers a mix of growth and security, which is crucial as you enjoy your retirement years.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

Ans: Hello Apurv and thanks for writing to me.

Note that I only discuss mutual funds in this column and so will not advise for or against any other asset classes.

To generate inflation beating returns, given that you are retired and would not like to take undue risk, I believe a mix of balanced advantage funds and multi asset funds will be ideal to invest in for a period of around 3 years. Starting SWP's from those schemes after 3 years will help you meet living expenses while your corpus continues to grow.

You can consider investing your funds equally in:
1-ICICI Prudential Regular Savings Fund
2-SBI Conservative Hybrid Fund
3-Tata Balanced Advantage Fund
4-Aditya Birla Sun Life Balanced Advantage Fund
5-Nippon India Multi Asset Fund

Ans: Your father's decision to re-enter the investment arena after a hiatus is understandable, especially with a sum of 2.75 lakhs at his disposal. Let's evaluate the suitability of aggressive hybrid funds, large and mid cap funds (LC-MC), and high-risk flexi cap funds for his investment goals.

Assessment of Investment Options
1. Aggressive Hybrid Funds:

Risk-Return Profile: Aggressive hybrid funds typically invest around 65-80% in equities and the remainder in debt instruments.
Benefits: Offers a balanced approach with exposure to both equity and debt, suitable for conservative investors seeking moderate growth with lower volatility.
Consideration: While these funds provide stability, they may not maximize returns compared to pure equity funds.
2. Large and Mid Cap Funds (LC-MC):

Risk-Return Profile: LC-MC funds invest in a mix of large and mid cap stocks, providing diversification across market capitalizations.
Benefits: Offers potential for higher returns compared to large cap funds while maintaining a degree of stability.
Consideration: May be subject to higher volatility due to exposure to mid cap stocks.
3. High-Risk Flexi Cap Fund:

Risk-Return Profile: Flexi cap funds have the flexibility to invest across market capitalizations based on market conditions and fund manager discretion.
Benefits: Offers the potential for high returns by capitalizing on market opportunities across sectors and market segments.
Consideration: Comes with higher risk due to the aggressive investment approach and exposure to high-beta stocks.
Recommendations and Considerations
1. Investment Horizon:

Assess your father's investment horizon and risk tolerance before making investment decisions.
Longer investment horizon allows for more aggressive investment strategies.
2. Diversification:

Consider diversifying the investment across multiple asset classes and investment styles to mitigate risk.
Combination of equity, debt, and other assets can provide a balanced and resilient portfolio.
3. Professional Guidance:

Engage a Certified Financial Planner (CFP) to provide personalized advice tailored to your father's financial goals and risk profile.
A CFP can help optimize the investment strategy and ensure it aligns with long-term objectives.
4. Regular Monitoring:

Regularly review the performance of the chosen funds and make adjustments as needed.
Stay updated on market trends and economic conditions to make informed investment decisions.
Final Thoughts
Considering your father's investment goals and risk tolerance, a combination of aggressive hybrid funds, large and mid cap funds, and a high-risk flexi cap fund can be suitable for maximizing returns while managing risk. However, it's crucial to conduct thorough research, seek professional guidance, and regularly monitor the portfolio to ensure it remains aligned with his objectives.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in