Can I Achieve 18% CAGR with This Equity Mutual Fund Portfolio for Retirement?

Ans: Your equity mutual fund portfolio allocation is structured with a mix of large-cap, mid-cap, and small-cap funds, each serving a unique purpose. This setup aligns well for a 5-8 year investment period, as larger caps offer stability while mid and small caps deliver higher growth potential. However, an 18% CAGR target requires careful attention to fund selection, market cycles, and risk management. Let’s explore if your goals are feasible and examine key areas for potential improvement.

1. Portfolio Allocation Evaluation

Large Cap Allocation (40%)
Large caps provide stability with moderate growth potential. Your allocation here should help minimise volatility while maintaining steady growth. Generally, large-cap funds offer 10-12% annualised returns over the long term, making them a stabilising force in your portfolio.

However, expecting an 18% CAGR from the entire portfolio may be ambitious given the conservative growth nature of large caps.

Mid Cap Allocation (35%)
Mid-cap funds bridge the gap between the stability of large caps and the high growth potential of small caps. They often deliver returns around 14-16% over extended periods, though with higher volatility. Your 35% allocation reflects a balanced approach, yet returns depend heavily on market conditions, fund performance, and economic cycles. With your chosen funds, consistent monitoring and periodic rebalancing are essential.

Small Cap Allocation (25%)
Small-cap funds can indeed offer exceptional growth, averaging around 16-20% over longer durations. This allocation boosts the overall growth potential but also brings in considerable volatility. If market conditions are favourable, this segment could contribute significantly to your 18% CAGR goal. However, small-cap returns are highly cyclical, and down markets can impact this portion significantly.

2. Expectations for an 18% CAGR

Your goal of an 18% CAGR is possible but may be challenging. Historical data shows equity mutual funds typically deliver 12-14% CAGR over 5-8 years, with some portfolios achieving 15-18% during particularly favourable market cycles.

Managing Expectations
While a high return is possible, setting a target slightly below 18% may offer a more realistic outlook, accounting for varying market conditions and fund performance fluctuations. This will provide a safer margin if economic cycles underperform expectations.

Investment Horizon
Extending your time horizon beyond 5-8 years may increase your chances of reaching higher CAGR, as equity returns tend to stabilise and increase over longer periods.

Risk Tolerance Assessment
Small and mid-cap funds are more volatile, which requires a high-risk tolerance and a strong ability to endure market dips without impacting your goals.

3. Review of Selected Funds

Your selected funds have a solid reputation in their respective categories. Here’s a general assessment of each:

Mirae Asset Large Cap Fund
This fund’s large-cap focus offers stability, aligning with your objective. It is known for consistent returns, aligning well with your 40% large-cap allocation.

Motilal Oswal Mid Cap Fund
The Motilal Oswal fund’s mid-cap focus provides substantial growth potential. It is suitable for a 5-8 year horizon but requires regular performance reviews.

Kotak Emerging Equity Fund
Known for effective exposure to mid-caps, this fund aligns with your objective but may need periodic assessment to ensure it continues to perform in line with your 18% CAGR target.

Nippon India Small Cap Fund
Small caps are inherently volatile but offer strong growth potential. This fund provides significant upside potential, although it demands careful monitoring, especially during market corrections.

4. Actively Managed Funds vs. Index Funds

Actively managed funds, as chosen in your portfolio, often outperform index funds, especially in mid and small caps. Index funds lack flexibility, whereas actively managed funds offer portfolio adjustments by fund managers, especially beneficial during market fluctuations. Relying on a Certified Financial Planner for actively managed fund selection and rebalancing can ensure ongoing alignment with your goals.

5. Regular Portfolio Rebalancing

Regular rebalancing is essential for risk management and optimal growth.

Market Conditions
Equity markets are unpredictable. Rebalancing every 12-18 months will help you take advantage of market upswings while protecting gains.

Aligning with Changing Goals
As your retirement timeline progresses, shifting a portion of your equity allocation to more conservative options may be beneficial. This reduces exposure to volatility as your retirement approaches.

6. Considerations on Direct Funds vs. Regular Funds

Direct funds can offer cost advantages, but working through a Certified Financial Planner can provide crucial professional oversight. This guidance is especially valuable for achieving and adjusting high CAGR targets, like your 18% expectation. A CFP will help assess performance, market conditions, and portfolio adjustments while enhancing your chances of meeting your goals.

7. Capital Gains Tax Implications

Understanding capital gains tax rules is vital to maximise returns:

Long-Term Capital Gains (LTCG)
Equity mutual fund LTCG above Rs 1.25 lakh is taxed at 12.5%.

Short-Term Capital Gains (STCG)
Short-term gains are taxed at 20%. These rules impact how and when you sell, so strategise your withdrawals to minimise tax.

Consulting a tax expert can help optimise your exit strategy, reducing tax impacts on your returns.

Final Insights

Your portfolio aligns well with your objectives, but an 18% CAGR expectation might need adjustment based on market trends. Actively managing and rebalancing your portfolio can enhance your chances of reaching your targets. Remember, equity investment performance may fluctuate, so regular review is essential.

Working with a Certified Financial Planner will add value in ensuring your portfolio stays aligned with your retirement goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

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