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Ramalingam

Ramalingam Kalirajan  |3819 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 23, 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
Sandeep Question by Sandeep on May 18, 2024Hindi
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I am planning to Invest in NFO (HDFC Manufacturing Fund). And plan to invest for 2 years the same amount. And after that every year increase by 10% to 15%. How good is this Investment plan. Please advise.

Ans: Your interest in investing in the HDFC Manufacturing Fund New Fund Offer (NFO) is commendable. It’s crucial to evaluate such investments carefully, especially when considering sectoral funds and NFOs. Let’s explore the potential downsides of NFOs and sectoral funds and understand why you might want to consider other options.

Firstly, your proactive approach to increasing your investment amount annually by 10% to 15% is excellent. This strategy reflects a commitment to growing your wealth systematically.

Understanding NFOs
Lack of Performance History
One of the primary disadvantages of investing in NFOs is the lack of a performance track record. Unlike established funds, NFOs do not have historical data to demonstrate how they perform across different market cycles. This makes it challenging to gauge their potential for future returns.

Marketing Hype
NFOs are often heavily marketed, creating a sense of urgency and excitement. However, this hype can overshadow the fund’s actual investment strategy and potential risks. Investors might get swayed by marketing campaigns without fully understanding the implications of their investment.

Initial Costs
NFOs sometimes come with initial costs, such as entry loads, which can eat into your returns. Established funds often have lower expense ratios and no entry loads, making them more cost-effective in the long run.

Disadvantages of Sectoral Funds
High Risk and Volatility
Sectoral funds, like the HDFC Manufacturing Fund, focus on a specific industry. This concentration can lead to high risk and volatility. If the manufacturing sector faces a downturn, your entire investment could be adversely affected. Diversification is limited, increasing the impact of sector-specific risks.

Lack of Diversification
Sectoral funds do not offer the broad diversification found in multi-cap or flexi-cap funds. Investing heavily in one sector means your portfolio is not protected against risks in that particular sector. Diversified funds spread investments across various sectors, reducing overall risk.

Economic Cycles Impact
Sectoral funds are highly sensitive to economic cycles. The manufacturing sector, for example, can be significantly affected by economic downturns, changes in government policies, and global market conditions. This sensitivity can lead to unpredictable returns.

Evaluating Your Investment Strategy
Investment Horizon
Given your plan to invest for two years and then increase your investment annually, it’s essential to align your strategy with your financial goals and risk tolerance. Sectoral funds are generally more suitable for experienced investors with a higher risk appetite and a longer investment horizon.

Consider Diversified Funds
Instead of sectoral funds, consider investing in diversified equity funds. These funds spread your investment across various sectors and companies, providing better risk management and potentially more stable returns. Diversified funds can include large-cap, mid-cap, and small-cap stocks, offering a balanced approach.

Professional Guidance
Seek advice from a Certified Financial Planner (CFP) to ensure your investment strategy aligns with your long-term financial goals. A CFP can provide personalized recommendations based on your risk profile and investment objectives.

Conclusion
Investing in NFOs and sectoral funds comes with significant risks due to the lack of performance history, high volatility, and limited diversification. Instead, consider diversified equity funds for a more balanced and stable investment approach. Your proactive strategy of increasing investment annually is commendable, and with the right guidance, you can achieve your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
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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Asked by Anonymous - Oct 27, 2023Hindi
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I have been investing 15k per month through 1. HDFC large and mid cap fund-Growth Regular 5k 2.Icici prudential dividend yield equity fund regular plan 5k. 3.HDFC Balanced Advantage Fund Regular 5k.Please advise if I should continue with the same. Investment time for 3 yrs
Ans: Your commitment to investing regularly is commendable. Let's review your current investment portfolio and provide guidance on whether you should continue with the same funds.

Current Portfolio Overview

You are currently investing Rs 15,000 per month in three mutual funds:

HDFC Large and Mid Cap Fund - Growth Regular: Rs 5,000
ICICI Prudential Dividend Yield Equity Fund Regular Plan: Rs 5,000
HDFC Balanced Advantage Fund Regular: Rs 5,000
Evaluating Existing Funds

HDFC Large and Mid Cap Fund:

This fund invests in both large-cap and mid-cap stocks, offering a balanced approach to growth. It provides diversification across market capitalizations.
Large and mid-cap funds can be volatile in the short term but have the potential to deliver strong returns over the long term.
Consider the fund's performance relative to its benchmark and peers to assess its suitability for your investment horizon.
ICICI Prudential Dividend Yield Equity Fund:

This fund aims to invest in dividend-paying stocks, focusing on companies with stable dividend yields.
Dividend yield funds can provide regular income, making them suitable for investors seeking income generation along with capital appreciation.
Evaluate the fund's performance and dividend payout history to ensure it aligns with your income requirements and investment goals.
HDFC Balanced Advantage Fund:

This fund follows a dynamic asset allocation strategy, adjusting equity and debt exposure based on market conditions.
Balanced advantage funds offer downside protection during market downturns while participating in equity market upside.
Review the fund's asset allocation approach and performance to determine its effectiveness in managing market volatility and delivering consistent returns.
Assessing Investment Timeframe

Given your investment timeframe of 3 years, it's crucial to consider the risk profile and potential volatility of the chosen funds. Equity-oriented funds like large and mid-cap funds and balanced advantage funds may be subject to market fluctuations, which could impact short-term returns.

Considerations for Continuing with the Same Funds

Risk Appetite:

Assess your risk tolerance and comfort level with market volatility. Equity funds, including large and mid-cap funds, carry higher risk but also offer the potential for higher returns over the long term.
Balanced advantage funds provide a more conservative approach by dynamically adjusting asset allocation, which may suit investors with a lower risk appetite.
Investment Goals:

Revisit your investment objectives and financial goals. Ensure that your chosen funds align with your goals, whether they are wealth accumulation, income generation, or capital preservation.
Performance Review:

Evaluate the historical performance of each fund, considering both short-term and long-term returns. Assess how the funds have performed during different market cycles and their ability to meet their investment objectives.
Guidance for the Future

Portfolio Review:

Regularly review your portfolio's performance and make adjustments as necessary. Consider rebalancing your asset allocation if your risk profile or investment goals change.
Diversification:

Assess the diversification of your portfolio across asset classes, sectors, and investment styles. Diversification can help manage risk and enhance overall portfolio stability.
Professional Advice:

Consider seeking guidance from a Certified Financial Planner (CFP) to ensure your investment decisions align with your financial goals and risk tolerance. A CFP can provide personalized advice tailored to your specific circumstances.
Conclusion

Your current investment strategy reflects a diversified approach across different fund categories. To determine whether to continue with the same funds, assess your risk tolerance, investment goals, and the performance of the chosen funds. Regular portfolio review and professional advice can help you make informed decisions and stay on track to achieve your financial objectives.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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Ramalingam

Ramalingam Kalirajan  |3819 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 08, 2024

Asked by Anonymous - May 08, 2024Hindi
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Hi Sir, i have invested Rs 2 lacs in HDFC Manufacturing NFO. I am looking at a horizon of 5 years plus. Is it a good decision? If 5 years is a good timeline for appreciation, do you suggest i invest a little more , around 3 lacs so total 5 lacs? Kindly suggest.
Ans: It's great to see your interest in exploring investment opportunities, but it's important to carefully evaluate your options, especially with thematic funds like HDFC Manufacturing NFO. Here's some advice to consider:

Thematic funds like HDFC Manufacturing NFO focus on specific sectors or themes, in this case, the manufacturing sector. While these funds can offer potential for high returns during favorable market conditions, they also come with higher risks and volatility due to their concentrated exposure. Here are some key points to consider:

Risk and Volatility: Thematic funds are inherently riskier than diversified equity funds because they invest in a specific sector or theme. Any adverse developments or changes in the sector's fundamentals can significantly impact the fund's performance.
Cyclical Nature: Sectoral funds are often cyclical, meaning their performance is closely tied to the economic cycles and business cycles of the specific sector they invest in. This can lead to periods of outperformance followed by periods of underperformance.
Lack of Diversification: Thematic funds lack diversification as they focus on a specific sector or theme. Diversification is crucial for reducing risk and minimizing the impact of adverse events in any particular sector.
Long-Term Considerations: While thematic funds can offer short-term gains during favorable market conditions, they may not be suitable for long-term wealth creation. Diversified equity funds, on the other hand, provide broader exposure to multiple sectors and companies, reducing concentration risk.
Considering these factors, it's important to assess whether the potential benefits of investing in HDFC Manufacturing NFO outweigh the risks, especially given your investment horizon of 5 years plus. Instead of concentrating your investments in a single thematic fund, you may consider diversifying your portfolio by investing in a mix of diversified equity funds across different market segments. This approach can help spread risk and potentially offer more stable returns over the long term.

As for investing an additional 3 lakhs in HDFC Manufacturing NFO, it's advisable to first evaluate your overall asset allocation, risk tolerance, and investment goals before making any further commitments. Consulting with a Certified Financial Planner can provide personalized guidance tailored to your financial objectives and help you make informed investment decisions.

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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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