Hello Sir, first of all thanks for sharing your valuable inputs in this column. My age is 42 & i am currently investing in 4 funds through SIP of Rs.5000 each. UTI Nifty 50 index, Parag Parikh Flexi cap fund, ICICI Prudential Midcap 150 index fund & Quant flexi cap fund. My plan is to invest for next 3 years through regular SIP & additionally by some more units on dips. After 3 years i will stop SIP ( as i might loose job by 45) & keep the accumulated funds as it is for next 8 years. Please share views on this, if funds are alright considering my age, duration etc. or you can suggest any additions/modifications. Also how much returns (per year) i may expect with this portfolio. Thanks Again.
Ans: It's great to see your proactive approach towards financial planning, especially considering your age and future plans. Let's evaluate your current investment strategy and explore potential modifications to align with your goals.
Reviewing Your Current Portfolio
You're currently investing in four funds through SIPs, focusing on index funds and flexi cap funds. This diversified approach is commendable and reflects a balanced strategy.
Assessing the Funds
Flexi Cap Funds
Parag Parikh Flexi Cap Fund: Offers flexibility to invest across market caps, providing diversification.
Quant Flexi Cap Fund: Another flexible option, potentially offering higher returns with increased risk.
Index Funds
UTI Nifty 50 Index: Tracks the Nifty 50 index, providing exposure to large-cap stocks.
ICICI Prudential Midcap 150 Index Fund: Focuses on mid-cap stocks, offering higher growth potential.
Active vs. Passive Management:
While you've included both actively managed mutual funds and index funds (ETFs) in your portfolio, it's important to understand the differences between the two. Actively managed funds aim to outperform the market through active stock selection and portfolio management, while index funds passively track a specific index's performance.
Benefits of Actively Managed Funds:
Actively managed funds offer the potential for higher returns compared to index funds, especially during market inefficiencies or when skilled fund managers can identify lucrative investment opportunities. Additionally, active management allows for flexibility in portfolio construction and adjustments based on market conditions.
Potential Disadvantages of Index Funds:
While index funds offer low expense ratios and broad market exposure, they may lack the potential for outperformance compared to actively managed funds. Additionally, they're subject to tracking error, which occurs when the fund's performance deviates from the index it's designed to replicate.
Duration and Strategy
Your plan to continue SIPs for the next three years and then hold the accumulated funds for another eight years is thoughtful. However, there are a few considerations to keep in mind.
Evaluating Your Plan
Market Volatility
SIP During Uncertain Times: Continuing SIPs during market downturns can lead to better long-term returns due to rupee cost averaging.
Stopping SIPs: Stopping SIPs abruptly may not be the best strategy, especially considering the potential impact on your accumulated corpus.
Job Security
Emergency Fund: Ensure you have an adequate emergency fund to cover living expenses in case of unexpected job loss.
Insurance Coverage: Consider enhancing your insurance coverage, including health and life insurance, to protect your family's financial well-being.
Potential Modifications
Duration of SIPs
Consider extending the duration of SIPs beyond three years, especially if your financial situation allows. Longer-term investments can capitalize on compounding and potentially higher returns.
Reviewing Fund Selection
Risk Tolerance: Assess your risk tolerance and ensure your fund selection aligns with it. Flexi cap funds may be suitable if you're comfortable with higher risk.
Diversification: Evaluate adding a debt component to your portfolio for stability, especially considering your age and the upcoming phase of holding the accumulated funds.
Expected Returns
Predicting exact returns is challenging due to market fluctuations. However, a diversified portfolio with a mix of equity and debt funds can aim for an average annual return of around 10% to 12%, considering historical market performance.
Consulting a Certified Financial Planner
Personalized Advice: A CFP can provide tailored investment strategies based on your goals, risk profile, and financial situation.
Holistic Planning: They consider various aspects like risk management, tax planning, and estate planning to ensure comprehensive financial well-being.
Conclusion
Your investment approach reflects careful consideration of your financial goals and circumstances. Consider extending the duration of SIPs and reviewing your fund selection to ensure alignment with your risk tolerance and long-term objectives.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in