Hello sir, I'm investing close to 1L per month total in3 funds - SBI Long Term Equity MF and HDFC ELSS Tax saver fund and quant ELSS tax saver fund. Is this a right strategy to generate continuous wealth or I need to re distribute it? Pls guide. Goal is to reach 1Cr in 5 years

Ans: It’s great that you are already investing Rs 1 lakh per month consistently in mutual funds. Your goal of reaching Rs 1 crore in 5 years is achievable, but let’s evaluate your current strategy.

You are investing in three ELSS (Equity Linked Savings Schemes), which are primarily tax-saving instruments with a 3-year lock-in period. They have the potential for equity-linked growth, and since you are investing heavily in them, we need to assess if this allocation is optimal for long-term wealth creation.

Let's break this down for better clarity.

ELSS – Is It Right for Your Goal?
ELSS funds are designed to offer both tax benefits under Section 80C and wealth creation through equity investments. However, your goal isn’t tax savings alone, but rather wealth accumulation.

Benefits of ELSS:
Tax Benefits: You can claim deductions up to Rs 1.5 lakh under Section 80C.

Equity Exposure: These funds invest in equity markets, which can provide good returns over the long term.

However, investing in multiple ELSS funds like you are doing may not always lead to optimal diversification or wealth creation.

Let’s evaluate your specific strategy.

Concentration in One Category
By focusing solely on ELSS funds, you are essentially concentrating on one category of mutual funds. While ELSS funds offer equity exposure, they have certain limitations.

Concerns:
Overexposure to a single category may reduce the overall diversification of your portfolio.

The 3-year lock-in period may impact your liquidity and flexibility.

ELSS funds are primarily designed for tax savings, and since you’re already investing a significant amount monthly, it may exceed your actual tax-saving needs.

ELSS schemes tend to invest in a mix of large-cap, mid-cap, and small-cap stocks, and too many overlapping funds may not offer meaningful diversification.

Diversification is Key for Wealth Creation
You may want to consider diversifying your investments into other types of equity mutual funds or asset classes to achieve balanced growth.

Why Diversify?
Equity Diversification: Instead of focusing solely on ELSS, consider adding a mix of large-cap, mid-cap, or multi-cap funds for broader exposure. These funds tend to have a better risk-return balance over time and can provide consistent wealth growth.

Debt Mutual Funds: A small allocation towards debt mutual funds can reduce the risk of your portfolio while ensuring some level of stable returns.

Balanced Advantage or Hybrid Funds: These funds automatically adjust the allocation between equity and debt, offering downside protection during volatile periods.

Active Fund Management for Higher Returns
As you aim for continuous wealth creation, it's important to leverage actively managed funds. While passive investments like index funds have low fees, they may not always outperform the market in India, especially in volatile periods.

Why Actively Managed Funds?
Better Risk Management: Fund managers actively select stocks and allocate assets, aiming for outperformance over time.

Flexibility: Active funds can adjust their portfolios based on market conditions, which can be a key advantage in achieving your financial goals.

Tax Efficiency Matters
While ELSS gives you a tax deduction, investing more than Rs 1.5 lakh per year into tax-saving funds offers no further benefits. For the rest of your investment, you should look for tax-efficient strategies that balance growth and safety.

Focus on Long-Term Capital Gains (LTCG)
By holding equity mutual funds for more than one year, you are eligible for long-term capital gains (LTCG) taxation, which is 12.5% on gains exceeding Rs 1.25 lakh per year. This is much more tax-efficient compared to the full taxation of dividends or interest from traditional investments like fixed deposits.

Liquidity and Flexibility
It’s also important to consider the liquidity of your investments. Since ELSS comes with a 3-year lock-in, your funds are tied up for a certain period. Having a more liquid portfolio can allow you to rebalance or redeploy capital if necessary.

Alternative Investment Options:
Multi-cap Funds: These funds invest across large, mid, and small-cap stocks, offering a more balanced exposure to the market with no lock-in.

Large-Cap Funds: These focus on well-established companies, providing steady growth and lower volatility compared to small or mid-cap stocks.

Hybrid Funds: These invest in both equity and debt, ensuring balanced risk while offering growth potential.

Adjusting Your Monthly Contribution
Currently, you're investing Rs 1 lakh per month in ELSS funds. It might be beneficial to redistribute your monthly contributions across different fund categories. This will help in achieving your goal of Rs 1 crore in 5 years by spreading your investments across both high-growth equity and stable debt funds.

Suggested Distribution:
Equity Funds: Allocate 60-70% of your monthly investment towards large-cap, multi-cap, or mid-cap funds. These funds offer the potential for high growth and align with your long-term goal.

Debt or Hybrid Funds: Allocate 30-40% towards debt or hybrid funds to add stability. These funds help reduce volatility and provide consistent returns.

Assessing Your Target of Rs 1 Crore
Reaching Rs 1 crore in 5 years is certainly possible, but it requires careful fund selection and portfolio management. By redistributing your funds into a diversified portfolio, you increase the chances of achieving steady and consistent growth while managing risk.

Key Factors to Consider:
Market Volatility: Equity markets can be volatile in the short term, so it’s crucial to have a well-diversified portfolio to absorb shocks.

Consistent Contributions: Stay disciplined with your monthly contributions and review your portfolio’s performance regularly.

Regular Review: Keep track of your portfolio’s performance. Rebalance if necessary to ensure you stay on track to achieve your goal.

Finally
Your strategy of investing in tax-saving ELSS funds is a good start, but diversifying into other mutual fund categories will help you achieve better long-term wealth creation. A mix of equity and debt funds will provide consistent returns with reduced risk. By reallocating your monthly investments, you can better manage risk, increase returns, and reach your goal of Rs 1 crore within 5 years.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
Instagram: https://www.instagram.com/holistic_investment_planners/