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Ramalingam Kalirajan |6814 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 26, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by M on Oct 26, 2024Hindi

I am investing 3K in HDFC Multicap, 2K in Quant Midcap and 1K in Quant Small cap, through SIP. I am a long term investor (above 10 years). Is this a correct portfolio? Should I not invest 2 schemes in a same MF house (Quant) as shares may overlap and not diversified investment styles? Please rebalnce the MF houses for me.

Ans: Building a long-term mutual fund portfolio requires diversification, both in terms of market capitalization and fund house selection. Your current portfolio with two schemes from a single fund house does raise a question about overlap. Let’s evaluate your approach from a broader perspective and adjust the structure for more balanced diversification.

Evaluating Your Current Portfolio
Your portfolio is structured with:

A Multicap Fund: This fund provides diversified exposure across large, mid, and small-cap stocks, offering stability and growth potential.

A Midcap Fund: Midcap funds are designed to add growth with some volatility, often balancing the large-cap weight in a portfolio.

A Small-Cap Fund: This segment offers higher growth potential, though it comes with more risk.

Diversifying Fund Houses for Better Balance
It’s sensible to diversify fund houses when investing across categories. Different fund houses follow varied management styles, risk-taking strategies, and research processes, leading to more unique exposure.

Potential Overlap: Holding two funds from the same house, like Quant, may lead to stock overlap. Quant funds, while typically high-growth, could concentrate on similar stocks or sectors, limiting exposure.

Different Investment Styles: Each fund house has unique strengths. Adding funds from different houses can provide a better blend of investment styles, whether value, growth, or balanced.

Suggested Portfolio Rebalance for 10-Year Goal
To achieve greater diversification and smoother returns, consider restructuring across different fund houses as follows:

Retain a Large-Cap or Multicap Foundation
Large or Multicap Fund: Keep the large-cap/multicap fund in your portfolio. If preferred, you may choose a new multicap fund from another fund house to avoid overlap and add broader diversification.
Midcap Fund for Balanced Growth
Midcap Allocation: Switch your midcap allocation to a different fund house. Each fund house has a distinct approach to managing midcap risk, so choosing another fund house could diversify your midcap strategy.
Small-Cap Fund for Long-Term Growth
Small-Cap Exposure: Consider switching to a small-cap fund from another fund house as well. Small-cap funds from different fund houses bring in unique research strengths, which can reduce concentration risk while retaining growth potential.
Ideal Fund House Selection
To optimise, select three fund houses known for strong performance, consistent management, and clear investment styles:

Balanced Mix of Approaches: Aim for fund houses with a mix of aggressive growth, balanced risk management, and value investing. A blend from well-rated fund houses can help achieve this.

Consistent Historical Returns: Evaluate each fund’s past performance to ensure it aligns with your risk tolerance and return expectations.

Taxation Insights on Mutual Fund Investments
With a 10-year horizon, understanding tax on capital gains is essential for your portfolio growth:

Equity Fund Taxation: If gains exceed Rs 1.25 lakh annually, they’re taxed at 12.5%. Short-term gains within a year attract a 20% rate. Holding long-term reduces tax burdens and aligns with equity growth.

Tax Planning: Staying invested in equity-focused funds for over a year qualifies for long-term capital gains (LTCG) tax benefits, making long-term holding tax-efficient.

Benefits of Regular Funds Over Direct Plans
Since you’re focusing on long-term growth, regular funds with Certified Financial Planner (CFP) assistance can be advantageous:

Personalized Monitoring: A CFP helps track market changes and adjusts your portfolio based on performance and goals, ensuring your portfolio aligns with changing market conditions.

Rebalancing as Required: Regular plan investors benefit from structured reviews, optimizing returns while managing risk.

Tax Efficiency and Cost Efficiency: CFP guidance can ensure you manage tax liabilities and optimize SIPs effectively, improving cost efficiency.

Final Insights
For a long-term, growth-oriented investor like you, a diversified mutual fund portfolio with varied fund houses and categories is key:

Diversify Fund Houses: Choose funds from different houses to limit overlap and bring in unique management expertise.

Monitor Small-Cap and Midcap Allocations: These funds offer growth but can be volatile. A balanced allocation with large/multicap can stabilize returns.

Seek CFP Guidance for Portfolio Oversight: A CFP can guide fund rebalancing, tax planning, and risk management to meet your 10-year goal.

By adjusting your portfolio with diverse fund houses and carefully selected categories, you can enhance growth potential, manage risk, and stay aligned with your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

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

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.