Hello Sir, I am 43 years old and earning an in hand monthly salary of Rs: 1.5 lakh. I completed my loan liabilities in 2023. My investment portfolio is as follows: NPS (Rs: 4250 monthly); PPF (Rs: 4250 monthly); LIC (Rs: 6000 monthly) and mutual funds (Rs: 15500 monthly via SIP initiated in 2023 with no top up plan and not comfortable with sectoral funds). My mutual fund investment horizon is for 20 years and the portfolio is as follows: ICICI Prudential Balanced Advantage Fund - Direct Plan - Growth (Rs: 1000); Debt fund (UTI Medium to Long Duration Fund with monthly SIP of Rs: 1000); ELSS [MIRAE Asset Tax saver fund-Direct Plan-Growth and Franklin India ELSS Tax Saver-Growth with a monthly SIP of Rs: 1500 each]; Flexi Fund [JM Flexicap Fund Direct with Growth Option of Rs: 1000]; SBI Gold Fund with a monthly SIP of Rs: 1000; Large Cap Fund [KOTAK Blue Chip Fund-Direct Plan-Growth; Invesco India Largecap Fund-Direct Plan Growth and HDFC Top 100 Fund - Direct Plan - Growth Option with a monthly SIP of Rs: 2000 each]; Axis Mid Cap Fund with a monthly SIP of Rs: 1500 and Edelweiss Small Cap Fund Direct Plan Growth with a monthly SIP of Rs: 1000. Please let me know a) Around 7 years back I had invested in different ELSS funds with a monthly SIP of Rs: 3500 with no discontinuation and it has matured currently with an average annual returns of 25 %. I used to review the portfolio annually but still kept on investing it via SIP despite a few of them showing negative returns initially. I would like to know how to decide if I need to discontinue any mutual fund if I review the portfolio annually as in my past experience the mutual funds have performed well if invested for a longer period of greater than 5 years. b) if the current mutual fund portfolio needs to be modified.
Ans: You have made excellent strides with your investment journey. Your portfolio is diversified, and you have a long-term approach with a 20-year horizon. Let’s evaluate your current portfolio and address your concerns about reviewing your mutual funds.
How to Decide on Discontinuing Mutual Funds
You have rightly mentioned that some mutual funds may underperform initially but do well over a longer period. Your experience of seeing good returns over 7 years is a solid example. Here's how you can approach the decision to discontinue any mutual fund.
1. Performance Comparison
Compare your funds' returns to the benchmark. If a fund consistently underperforms its benchmark for over 3 years, consider discontinuing it.
Some volatility is normal, but long-term underperformance can be a sign of concern.
2. Fund Management Changes
Keep an eye on the management of the mutual fund. If there's a change in the fund manager or the investment style, review its impact on performance.
A change in the fund manager may lead to a different investment approach, which may not align with your goals.
3. Asset Allocation Review
Review your overall asset allocation during your annual portfolio check. If any fund disturbs the balance of equity and debt, consider discontinuing it.
Stick to your planned risk tolerance and rebalance when needed.
4. Consistent Underperformance vs Peers
If a fund lags behind its peers for over 3-4 years, this may indicate inefficiency.
Compare your funds with other similar schemes. If you notice consistent underperformance, it’s better to exit.
5. High Expense Ratio
While performance matters, also look at the expense ratio. A high expense ratio can eat into returns over time.
If the fund's returns don't justify the cost, it’s wise to explore better alternatives.
Reviewing Your Mutual Fund Portfolio
You’ve selected various categories of funds, and that’s a good approach. Let’s analyze your portfolio to see if any modifications are needed.
1. Balanced Advantage and Debt Allocation
Your portfolio includes both equity and debt funds, ensuring a balanced risk approach.
The inclusion of UTI Medium to Long Duration Fund and ICICI Prudential Balanced Advantage Fund is suitable for long-term stability.
2. ELSS Funds
The ELSS funds in your portfolio are great tax-saving options.
These provide equity exposure and tax benefits under Section 80C.
As you have mentioned past ELSS funds performing well, continue reviewing these regularly to ensure they remain efficient.
3. Flexicap Fund
The JM Flexicap Fund provides flexibility across large-cap, mid-cap, and small-cap stocks.
This helps diversify risk and allows the fund to adjust to market conditions. It’s a good choice for long-term wealth creation.
4. Gold Fund
Your allocation to the SBI Gold Fund is a safe move, but don’t over-allocate.
Gold offers diversification but doesn’t provide high returns like equities over the long term.
A small portion of your portfolio in gold acts as a hedge, and your current allocation is appropriate.
5. Large Cap Fund
You have invested in three large-cap funds, which provides stability in your portfolio.
Large-cap funds are generally less volatile, but having multiple funds in the same category may lead to overlap.
Consider consolidating one or two of these large-cap funds to reduce redundancy.
6. Mid Cap and Small Cap Funds
The Axis Mid Cap Fund and Edelweiss Small Cap Fund add growth potential to your portfolio.
Mid-cap and small-cap funds can be volatile in the short term but provide good returns over the long run.
You’ve maintained a balanced allocation in these categories, which is aligned with your long-term goals.
Suggested Modifications to Your Mutual Fund Portfolio
Based on the above evaluation, here are a few suggestions for improving your portfolio:
1. Consolidate Large Cap Funds
You currently have three large-cap funds.
Large-cap funds often have similar stock holdings, so keeping two instead of three will simplify your portfolio without losing returns.
2. Consider SIP Top-Up Plan
You mentioned you’re not planning any top-up for your SIPs.
However, a small increase of 5%-10% annually can have a huge impact on wealth creation due to compounding.
It helps to fight inflation and boost returns.
3. Increase Debt Allocation Over Time
As you age, you should gradually increase your debt allocation.
This provides stability and reduces risk as you approach your retirement years.
You could allocate a portion of your future investments to more debt or balanced funds.
4. Keep Monitoring Performance
Continue your annual portfolio review practice.
It’s excellent that you’ve been doing this consistently, which helps identify underperforming funds early.
Final Insights
You’ve built a strong and diversified portfolio that’s well-positioned for the future. By consolidating a few funds and gradually increasing your debt allocation, you can further strengthen your financial position.
Continue reviewing your portfolio annually and make adjustments as necessary. Stick to your long-term plan, and don’t get distracted by short-term market fluctuations.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Asked on - Oct 15, 2024 | Answered on Oct 15, 2024
ListenDear Sir, Thank you for your detailed analysis on the mutual fund portfolio and your support is highly appreciated. As per your suggestion I have attempted to move for a SIP top up plan but most of the mutual fund companies do not permit the top up for the existing mutual funds. Usually the SIP top up plan is available while registering a new SIP. Either you need to invest in lumpsum or start a new SIP in the same mutual fund folio. Can you please suggest on how to move forward in such a scenario for SIP top up plan for the existing mutual funds? Additionally, please let me know if I intent to invest in lumpsum or start a new SIP in the same mutual fund folio (say after 3 years with the planning of having a top up plan) would it have any impact on the existing NAV units?
Ans: Thank you for your kind words.
In your case, you're right that many mutual fund companies only allow the SIP top-up option during the initial registration. To move forward, you can:
Start a new SIP: You can begin a fresh SIP in the same fund with the top-up option for future investments. This will not impact your existing investments.
Invest lumpsum: You can always invest lumpsum in the same folio. It won’t affect the NAV of your existing units, as the new units will be purchased at the current NAV.
I recommend reaching out to your Mutual Fund Distributor (MFD) for personalized guidance. They can help set this up seamlessly and advise on any future changes.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment