Seeking Expert Portfolio Review: 3 ELSS & 2 Small Cap Funds (10-15 Year Horizon)

Ans: Your dedication to investing over the past seven years, particularly in ELSS and small-cap funds, shows your commitment to wealth creation. Your portfolio is well-structured for long-term growth, especially with a 10-15 year horizon. Let’s take a closer look at your current investments and identify areas for potential improvement.

Understanding Your Investment Choices
Your portfolio consists of three ELSS funds and two small-cap funds. ELSS funds are primarily used for tax saving, but they also offer growth opportunities due to their equity exposure. Small-cap funds, on the other hand, are known for their high growth potential, albeit with higher risk. Given your risk tolerance and long-term outlook, your fund choices align with your goals.

Reviewing ELSS Funds
1. Reevaluating the Need for ELSS Funds
Since you no longer need ELSS funds for tax saving, it's worth reassessing their role in your portfolio.

ELSS funds have a lock-in period of 3 years, which is not a concern since you have been investing for 7 years. However, continuing to invest in them may not be the most efficient use of your resources.

Consider whether these funds are still providing the returns you expect, or if other equity funds could offer better growth without the lock-in period.

2. Performance and Diversification
While ELSS funds invest in a diversified portfolio of stocks, they may overlap in their stock holdings, leading to concentration risk.

It’s important to check the performance of each ELSS fund individually. If one or more funds have consistently underperformed, it may be time to redirect your investments.

Diversification is key. You might want to reduce the number of ELSS funds and allocate those resources to other equity funds with better performance and no lock-in.

Reviewing Small-Cap Funds
1. Potential for High Growth
Small-cap funds are known for their potential to deliver high returns, especially over a long-term horizon like yours.

Your choice of small-cap funds, given your risk tolerance and long-term goals, is appropriate. Small-cap funds tend to outperform large-cap and mid-cap funds during bull markets.

However, they also come with higher volatility. It's important to monitor these funds closely, especially during market downturns, to ensure they continue to align with your risk appetite.

2. Concentration Risk in Small-Cap Funds
While small-cap funds offer growth potential, they also come with the risk of concentration in a few sectors or stocks.

Assess the sectoral allocation of your small-cap funds. If both funds are heavily invested in similar sectors, you may want to diversify further to reduce risk.

Consider complementing your small-cap investments with funds that invest in mid-cap or flexi-cap stocks for a more balanced approach.

Recommendations for Future Investments
Given that you no longer need ELSS funds for tax saving, it’s wise to explore other investment avenues that align with your risk tolerance and long-term goals.

1. Switching to Actively Managed Equity Funds
Instead of continuing with ELSS funds, consider switching to actively managed equity funds. These funds offer the potential for higher returns without the lock-in period associated with ELSS.

Actively managed funds benefit from professional management, which can be particularly valuable in volatile markets. They have the flexibility to adjust their portfolios based on market conditions.

Avoid index funds as they tend to underperform in markets like India. Actively managed funds can take advantage of market inefficiencies and deliver better returns.

2. Diversifying Your Equity Exposure
Diversification is essential for reducing risk while aiming for high returns. Consider adding mid-cap or flexi-cap funds to your portfolio.

Mid-cap funds offer a balance between the high growth potential of small-caps and the stability of large-caps. Flexi-cap funds provide the flexibility to invest across different market capitalizations based on the fund manager’s view.

Ensure that your portfolio is not overly concentrated in one sector or type of fund. Diversification will help you navigate different market conditions more effectively.

3. Reviewing Fund Performance Regularly
Regularly review the performance of all your funds. This ensures that underperforming funds are identified early, and adjustments can be made.

Use the expertise of a Certified Financial Planner to help you assess fund performance and make informed decisions. A CFP can provide insights based on market trends and your personal financial goals.

Tax Implications and Withdrawal Strategy
While your focus is on long-term growth, it’s also important to consider the tax implications of your investments and how you plan to withdraw your funds when needed.

1. Tax Efficiency in Fund Selection
Even though you don’t need ELSS funds for tax saving, it’s still important to consider the tax implications of your investments.

Long-term capital gains (LTCG) on equity funds are taxed at 12.5% for gains exceeding Rs 1.25 lakh in a financial year. Plan your investments and withdrawals to minimize tax liability.

Investing in funds with a history of steady growth and lower turnover can help reduce taxable events, as frequent buying and selling of stocks within a fund can trigger tax liabilities.

2. Strategic Withdrawal Planning
As your investment horizon is 10-15 years, consider a systematic withdrawal plan (SWP) for when you need to start drawing down your investments.

An SWP allows you to withdraw a fixed amount regularly, providing a steady income stream while the remaining investment continues to grow.

Plan your withdrawals in a tax-efficient manner, taking into account the LTCG tax and any other applicable taxes.

Finally
Your portfolio reflects a solid understanding of the importance of long-term investing and a willingness to take calculated risks. However, as your financial situation evolves, so should your investment strategy. By reassessing your reliance on ELSS funds, diversifying further, and focusing on actively managed equity funds, you can enhance your portfolio’s potential for growth while managing risks effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in