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Investing for Studies: How Should I Diversify My Portfolio?

Ramalingam

Ramalingam Kalirajan  |7012 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 10, 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
Asked by Anonymous - Oct 10, 2024Hindi
Money

I am investing in mf from 4years . My portfolio looks like : 1:Icici pru. Tech direct plan growth invested ?52000 and total return 47% I want to diversifiy my protfolio and increae my sip by 500 .currently my sip in ?1500 . My goal is to get 3-4lakhs of corpus in next 3-4yrs for my studies. Kindly suggest me which type of funds should i choose.

Ans: You have made a good start by investing in a technology-focused fund. The return of 47% on your investment of Rs. 52,000 is impressive. However, sectoral funds like technology carry higher risk due to their concentrated exposure. They perform well during sector growth but may underperform during downturns. Since you are looking for a 3-4 year investment horizon for a goal like education, it’s crucial to diversify your portfolio.

By diversifying into different types of mutual funds, you can spread your risk and aim for more consistent returns. Given that you want to increase your SIP by Rs. 500 and your current SIP is Rs. 1,500, I will provide you with a broader strategy for meeting your goal of accumulating Rs. 3-4 lakhs within the next 3-4 years.

Investment Horizon and Risk Profile

Your goal is time-bound, and the horizon is relatively short (3-4 years). This places emphasis on stability while balancing growth. Since your current fund is technology-focused, it has the potential for high volatility. Thus, adding funds with a mix of growth and stability would be an ideal strategy.

For a goal within this time frame, I recommend diversifying into both equity and debt mutual funds, especially as equity funds may face short-term volatility. Below is a breakdown of what you can consider.

Diversification Strategy

Hybrid Funds
Hybrid funds invest in both equity and debt instruments. They provide growth potential through equity and cushion volatility with debt allocation. For your 3-4 year horizon, this category offers balanced risk and reward. A hybrid fund with a higher allocation towards debt will protect your investment in case of market downturns.

By allocating a part of your SIP to a hybrid fund, you can achieve a good balance between growth and stability. This will ensure that your portfolio is not overly exposed to market fluctuations while still benefiting from equity growth.

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Short-Term Debt Funds
Debt funds, especially short-term or ultra-short-term, are low-risk and can be a good addition when the goal is near-term. These funds invest in government bonds, corporate bonds, and other fixed-income securities with shorter maturity periods. They aim to offer better returns than fixed deposits while keeping risk minimal.

As your goal is education, which cannot be compromised, debt funds can provide the needed security for your capital. By having a portion in debt, you ensure that you can rely on these funds even if the equity market underperforms in the short term. A suggested allocation to short-term debt funds can reduce overall risk.

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Multi-Cap or Flexi-Cap Funds
For the equity portion, investing in a multi-cap or flexi-cap fund can provide a more diversified exposure across large, mid, and small-cap stocks. Unlike sectoral funds, multi-cap funds invest across different sectors, helping to minimize sector-specific risk.

Adding this type of fund ensures that you still participate in equity growth while maintaining a broader exposure. Given that your current investment is in a technology sectoral fund, a multi-cap fund can bring diversification, balancing the overall equity exposure. For the next 3-4 years, this could generate reasonable growth without too much concentration risk.

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Large-Cap Funds
To maintain some growth while minimizing risk, adding a large-cap equity fund can be beneficial. These funds invest in established companies with strong fundamentals. They tend to be more stable than mid or small-cap funds and are less volatile in the short term.

By adding a large-cap fund, you’ll ensure that a portion of your portfolio is invested in blue-chip companies. They provide steady growth and better downside protection, which is essential when the goal is close.

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Advantages of Actively Managed Funds over Index Funds

Although index funds might appear as an easy option for passive investment, actively managed funds are better for your goal. Actively managed funds have professional fund managers who can navigate the market, making adjustments based on performance and trends. They aim to outperform the market by investing in high-potential stocks and adjusting allocations when needed.

In contrast, index funds merely track a set index, limiting potential upside and not providing risk management during downturns. Your 3-4 year investment horizon demands active management to ensure optimized returns and balanced risks.

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Disadvantages of Direct Funds

Though you are currently investing in direct mutual funds, there are a few limitations you might face. Direct plans require constant monitoring and decision-making. This can be time-consuming and may lead to sub-optimal decisions if you’re not closely tracking the market or are unaware of when to switch or rebalance your portfolio.

Investing through a Certified Financial Planner (CFP) via regular funds gives you access to professional advice and helps you focus on your goals without getting lost in the daily volatility or changes in fund performance. The advisor can help monitor your portfolio, recommend rebalancing, and ensure that you remain aligned with your goal, which is essential for meeting your target corpus.

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Adjusting Your SIP Allocation

Given that you wish to increase your SIP by Rs. 500 and your goal is Rs. 3-4 lakhs within 3-4 years, I suggest allocating your SIP as follows:

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Hybrid Fund (30-40% of the SIP)
Allocating Rs. 500-700 from your increased SIP towards a hybrid fund can provide a balance of equity and debt. This will add stability to your portfolio while still allowing some growth. It’s essential to mitigate risk, especially for such a near-term goal.

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Multi-Cap or Flexi-Cap Fund (20-30% of the SIP)
Rs. 400-600 should be directed to a multi-cap fund. This will diversify your equity exposure and provide a safer route to growth. Given the unpredictable nature of sectoral funds, this fund can smoothen the returns and provide stability.

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Debt Fund (20-25% of the SIP)
Rs. 300-400 can go into a short-term debt fund. This will ensure that part of your investment is secure and accessible when needed. With the timeline for your goal being short, capital protection becomes essential.

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Large-Cap Fund (15-20% of the SIP)
Rs. 200-300 can be invested in a large-cap fund for stable equity exposure. This will offer participation in the equity market but with lower risk compared to mid or small-cap stocks.

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Taxation Consideration

It’s important to be aware of the taxation on mutual fund returns when you redeem your investments.

For equity mutual funds, long-term capital gains (LTCG) above Rs. 1.25 lakh are taxed at 12.5%. If you redeem your investments within three years, short-term capital gains (STCG) are taxed at 20%. Debt mutual funds are taxed according to your income tax slab, both for short-term and long-term gains.

Keeping track of these rules ensures that you can optimise your withdrawals to minimize tax impact.

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Final Insights

Your current SIP investment in a technology-focused fund has performed well, but to meet your 3-4 year goal, diversification is essential. A mix of hybrid, multi-cap, large-cap, and debt funds will offer a balanced approach. This way, you can mitigate risk while still aiming for growth.

The decision to increase your SIP is the right move, but diversification will help protect your investment against market volatility. By focusing on stability through hybrid and debt funds while keeping some equity exposure, you’ll be well on track to achieve your Rs. 3-4 lakh target within the next few years.

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.
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Ramalingam

Ramalingam Kalirajan  |7012 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 20, 2024

Asked by Anonymous - Aug 16, 2024Hindi
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Hello Sir, I am 48 years old and I am investing in mutual fund from 2017 and market value of mutual fund portfolio is 37 Lac and I am investing in following MF in through SIP Parag Parikh flexi cap fund 12 K Mirae asset Large and mid cap fund 5K Kotak emerging equity fund 5K Quant Active fund 5K Nippon India small cap fund 5K And following is lumpsum investment Quant large cap fund 250000 DSP Nifty 50 index fund 200000 ICICI pru short term fund 200000 JM flexi cap fund. 100000 Quant mid cap fund. 70000 I am planning to increase SIP by 10000 This I am planning for 10 years plan for retirement Kindly please suggest MF or guide me for any changes if any needed Thank you ???? Raj
Ans: Your current portfolio shows a solid mix of funds across various categories. You have SIPs in Flexi Cap, Large & Mid Cap, Emerging Equity, Small Cap, and Active funds. Additionally, you have lump sum investments in Large Cap, Index, Short Term, and Mid Cap funds. This diversification strategy is commendable as it balances risk across different market segments.

However, there are a few areas that could be optimized for better returns and lower risk, especially considering your 10-year retirement goal.

Disadvantages of Index Funds
You've invested a lump sum in an Index Fund. Index Funds track a specific benchmark, usually the Nifty 50 or Sensex. While they have lower expense ratios, they also lack the flexibility to adapt to market changes.

Active funds, on the other hand, allow fund managers to pick stocks that can outperform the market. In the long term, this can result in higher returns. Therefore, considering your retirement goal, shifting from the Index Fund to an actively managed fund might be more beneficial.

Regular Funds vs. Direct Funds
You haven’t specified whether your investments are in regular or direct funds. If you are considering direct funds, it’s important to know their limitations. Direct funds have lower expense ratios, but they don’t come with professional advice.

Certified Financial Planners (CFP) provide guidance, periodic reviews, and help in rebalancing your portfolio based on market conditions and your financial goals. Investing through a CFP ensures your portfolio is always aligned with your objectives.

Evaluation of Your SIPs
Flexi Cap Fund: This is a good choice, providing flexibility to invest across market caps. However, it might be wise to ensure your exposure isn't overly concentrated in any single market cap.

Large & Mid Cap Fund: This fund offers a balance between stability (large caps) and growth potential (mid caps). Continue this SIP as it aligns with your retirement goals.

Emerging Equity Fund: Mid and small caps tend to be more volatile. Consider reviewing this SIP annually to ensure it meets your risk tolerance.

Active Fund: Active funds can outperform benchmarks if managed well. Continue this SIP, but keep track of the fund’s performance.

Small Cap Fund: Small caps can offer high growth but with higher risk. Given your retirement goal, ensure this SIP doesn’t exceed 20% of your total SIPs, as it could add unnecessary volatility to your portfolio.

Assessment of Lump Sum Investments
Large Cap Fund: Large Cap funds are relatively stable, providing consistent returns. This should be a cornerstone of your portfolio.

Index Fund: As discussed, consider switching this to an actively managed fund for better returns.

Short Term Fund: This is a conservative choice, good for parking funds temporarily. However, for long-term growth, these funds may not be ideal.

Flexi Cap Fund: Diversification is key here, and the fund’s flexibility is advantageous. Continue to monitor its performance.

Mid Cap Fund: This fund offers growth potential but with some risk. Ensure this investment complements your overall portfolio strategy without overexposing you to mid-cap volatility.

Increasing Your SIP
Increasing your SIP by Rs 10,000 is a wise decision. Here’s how you might allocate it:

Allocate Rs 5,000 to a Balanced Advantage Fund: This will add stability to your portfolio by balancing equity and debt exposure. It’s a conservative choice that can offer better risk-adjusted returns.

Allocate Rs 5,000 to a Focused Equity Fund: This can potentially offer higher returns as the fund manager focuses on a limited number of high-conviction stocks.

Portfolio Rebalancing and Monitoring
Rebalancing your portfolio regularly is crucial. Markets can be unpredictable, and what works today might not work tomorrow. Review your portfolio every six months to ensure it’s aligned with your risk tolerance and retirement goals.

Final Insights
Your portfolio is well-diversified, but there are opportunities to optimize it further. By shifting from index funds to actively managed funds, and considering the guidance of a Certified Financial Planner, you can potentially achieve better returns. Increasing your SIP is a positive step towards securing your retirement, but make sure to allocate it wisely across different fund categories.

In summary:

Consider shifting from Index Fund to an actively managed fund.

Evaluate your exposure to small caps and ensure it aligns with your risk tolerance.

Invest the additional SIP amount in balanced and focused equity funds.

Regularly rebalance your portfolio and seek guidance from a CFP.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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