MFs in portfolio showing less than 20% XIRR in 20+ years - What should I do?

Ans: A detailed evaluation of your portfolio over a long-term horizon, like 20+ years, is crucial. Below, I provide a structured analysis to help you make an informed decision on whether to hold these funds or opt for SWP and reinvest in other funds. I'll also touch on portfolio diversification, the benefits of active management, and tax implications for mutual funds to ensure a 360-degree view.

Analysing Fund Performance Based on XIRR
The funds you've mentioned have an XIRR of below 20%, with performance ranging from 16.92% to 17.23%. While these returns might appear moderate when compared to some high-performing funds, they are still within a reasonable range, especially considering market fluctuations and economic events.

Long-Term Perspective: Given your long investment horizon of 20+ years, the annualised returns around 16-17% can be quite powerful in generating wealth over time. Equity funds generally tend to perform better over longer terms due to market cycles and compounding.

Reviewing Fund Strategies: Both funds are Flexi Cap funds, which offer exposure to companies of different sizes, sectors, and growth stages. Their performance may vary depending on market conditions and fund manager strategies, but their flexibility is typically beneficial over long periods.

Pros and Cons of Holding vs. SWP and Reinvestment
Benefits of Holding the Current Funds
Consistency in Returns: While the returns are below 20%, they remain relatively stable and reliable, with compounded growth.

Lower Transaction Costs: Selling or switching funds can incur costs such as exit loads and capital gains tax. By holding, you avoid these charges and the risk of reinvestment.

Compounding Potential: Over time, consistent returns compounded in a single fund can grow significantly. Switching funds too frequently may disrupt this compounding advantage.

Potential Benefits of SWP and Reinvesting
Rebalancing the Portfolio: SWP into new funds can provide better sector or asset class diversification, depending on your current portfolio makeup.

Tax-Efficient Withdrawals: SWP can provide a regular income, if needed, and is tax-efficient as only gains are taxed, not the principal. However, ensure the SWP aligns with your needs since it would reduce the compounded growth.

Better Fund Selection: Some actively managed funds with high-quality fund managers might offer higher growth potential. With careful selection, reinvested funds could yield enhanced returns in future market cycles.

Examining Actively Managed Funds over Index Funds
If considering reinvestment, actively managed funds are generally better suited to align with specific goals. They provide:

Manager Expertise: Actively managed funds adapt to market changes and opportunities, whereas index funds are passive and less flexible.

Higher Growth Potential: Actively managed funds, particularly those with expert fund managers, often have the ability to outperform indices in the long term.

Disadvantages of Direct Plans
If you’re currently investing directly, moving to a regular plan via a Certified Financial Planner (CFP) could benefit your portfolio. Here’s why:

Professional Guidance: With a CFP, you get personalised advice based on market trends and your financial goals.

Regular Monitoring: Direct investments lack regular, professional oversight. A CFP helps monitor performance, adjusting as needed.

Strategic Diversification: A CFP can recommend funds that align with your specific needs, ensuring you avoid common pitfalls and optimise your portfolio.

Assessing Tax Implications for SWP and Fund Shifts
Since tax efficiency is essential for long-term investing, understanding capital gains tax for mutual funds is vital:

Equity Mutual Funds: For equity mutual funds, long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%, and short-term capital gains (STCG) are taxed at 20%.

Impact of SWP: When opting for SWP, each withdrawal may incur LTCG or STCG based on the holding period. Ensure withdrawals align with the latest tax rules to manage liabilities effectively.

By carefully balancing withdrawals and reinvestments, you can maximise gains without facing excessive tax burdens.

Considerations for the Long Term
For a 20+ year horizon, consider the following key points to maximise growth:

Diversify Across Sectors and Capitalisation: Diversify not just in Flexi Cap funds but across different fund categories for broader exposure.

Monitor Portfolio Health: Revisit your portfolio yearly with your CFP to ensure alignment with market conditions and personal goals.

Review Financial Goals Periodically: Your goals and risk tolerance may change over time. Regular reviews ensure your investments stay aligned with your long-term objectives.

Final Insights
In summary, maintaining your investments in the current funds with an XIRR below 20% could still yield significant growth over 20 years. Consistent performance, compounded annually, has substantial growth potential, especially in a Flexi Cap strategy. While switching funds might offer short-term benefits, consider the potential transaction costs and tax impacts.

If you wish for consistent income, a carefully structured SWP can help. Just ensure that any reinvested funds are actively managed and aligned with your objectives. Lastly, working with a CFP to manage, monitor, and rebalance your portfolio periodically would enhance the overall growth and stability of your investments.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment