Worried about Negative SIP XIRR? Should I Invest More or Do Something Else?

Ans: Please continue

Ans: Your Current SIP Portfolio
You have been investing ?3,000 monthly across various SIPs for a year. Your chosen funds focus on technology, healthcare, commodities, and other sectors. This shows a good start towards disciplined investing.

Concentration in Technology Sector
A significant portion of your investments is in technology-focused funds. Technology funds can offer high returns but also come with high volatility.

Sector-Specific Funds
You also have investments in healthcare, commodities, and logistics funds. Sector-specific funds can be very volatile as they depend on the performance of their respective sectors.

Diversification
Your portfolio lacks diversification. Investing too much in a single sector increases risk. Diversification helps in balancing risk and returns.

Importance of Broad Market Exposure
Diversifying across different market segments reduces risk. Balanced exposure to large-cap, mid-cap, and small-cap funds is crucial. This strategy ensures you are not overly dependent on one sector's performance.

Adding Stability with Debt Funds
Including debt funds can provide stability. Debt funds offer regular returns and reduce the overall risk in your portfolio. This balance is vital for long-term growth.

Benefits of Actively Managed Funds
Actively managed funds can outperform index funds due to professional management. Fund managers actively select stocks to maximize returns. This can be advantageous, especially in volatile markets.

Disadvantages of Index Funds
Index funds mirror the market index and do not aim to outperform it. They lack flexibility in changing market conditions. Actively managed funds, on the other hand, adapt to market changes, providing better growth potential.

Direct Funds vs. Regular Funds
Direct funds have lower expense ratios but require thorough research and monitoring. Regular funds, through a Mutual Fund Distributor (MFD) with a Certified Financial Planner (CFP), offer professional guidance and management. This can be valuable for optimizing returns and managing risks effectively.

Suggested Modifications
Reduce Sector-Specific Overweight

Reduce the number of technology and sector-specific funds. This will help in balancing the portfolio and reducing sector-specific risks.

Increase Broad Market Exposure

Allocate more funds to diversified equity funds. Large-cap and multi-cap funds provide stable returns and reduce overall risk.

Include Debt Funds for Stability

Add debt or hybrid funds to your portfolio. This will provide regular returns and reduce the volatility of your overall investment.

Suggested Allocation
Technology Funds: Choose one or two funds to maintain some exposure but reduce concentration.
Broad Market Funds: Increase investment in large-cap and multi-cap funds for stable growth.
Debt Funds: Allocate a portion to debt funds for stability.
Regular Monitoring and Review
Monitor your investments regularly. Review fund performance annually and adjust your portfolio based on your financial goals and market conditions.

Conclusion
Your dedication to investing through SIPs is commendable. With a few adjustments, you can achieve a balanced and diversified portfolio. This will help you meet your long-term financial goals with reduced risk.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Public Sector Undertaking (PSU) funds can sometimes show volatility, especially in the short term. Since you’ve noticed negative returns from your Rs. 10,000 investment, it’s understandable to feel concerned. Let’s break down the situation to help you decide whether to stop or reduce your Systematic Investment Plan (SIP) in PSU funds.

Long-Term Nature of PSU Investments
First, it’s important to appreciate that PSU funds are typically more volatile because they are heavily influenced by government policies, economic cycles, and sector-specific challenges. These funds are not known for consistent short-term returns but are better suited for long-term investors who are patient.

If your investment horizon is more than five years, you might still see recovery and positive returns as PSUs tend to perform well in certain market phases. If you reduce or stop your investment now, you may miss out on potential future gains. So, patience can be rewarding here.

Negative Returns: Short-Term Market Fluctuations or a Deeper Concern?
It is quite common to see negative returns during volatile periods. However, negative returns do not always indicate poor fund performance. The market as a whole might be going through a down phase, and PSUs tend to react more dramatically. It’s critical to evaluate the following factors before making any decisions:

Fund’s Track Record: How has the fund performed in the past, particularly over 3, 5, or 7 years? If its long-term performance is strong, then short-term negative returns are not necessarily a red flag.

Sector Outlook: Are there any changes in the sector or government policies that could impact PSU stocks? A sectoral slowdown or specific challenges for PSUs may result in underperformance for the time being.

Your Investment Horizon: If your financial goals are far off, it may make sense to continue your SIP and ride out the market fluctuations. However, if you need the money sooner, reducing your exposure could be worth considering.

Consider Diversification Over Complete Exit
If the volatility in PSU funds is a concern, you don’t need to stop investing entirely. Instead, reducing your SIP amount from Rs. 10,000 to Rs. 5,000 can be a more balanced approach. This strategy allows you to keep some exposure to PSU funds, which could benefit from sectoral rebounds in the future, while freeing up money for other more stable investments.

Reducing the SIP amount can give you peace of mind while maintaining long-term potential in your portfolio.

Benefits of Actively Managed Funds
Rather than focusing solely on PSU funds, you may want to allocate part of your investment to actively managed funds. Unlike index funds or ETFs, actively managed funds have professionals making informed decisions about which stocks to buy and sell. This gives you the benefit of market insights and adjustments based on performance. It can help stabilize your returns, as these funds are often more diversified across various sectors.

This diversification lowers the risk of overexposure to a single sector, such as PSUs. By spreading your investment across multiple sectors through actively managed funds, you can improve your portfolio’s balance.

Avoiding Index Funds and Direct Mutual Funds
It is important to understand that index funds, though cheaper, are not always the best option. They simply mimic the index and lack the flexibility to shift when market conditions change. This can expose you to more risk, especially when sectors like PSUs face challenges.

Direct mutual funds might seem like a good choice to save on commissions, but they often require extensive market knowledge. For most investors, it is better to work with a Mutual Fund Distributor (MFD) who has a Certified Financial Planner (CFP) credential. They can help you select funds that align with your financial goals and risk profile.

Alternatives for More Stability
If PSU funds are causing too much concern, you could consider reallocating part of your investment to funds with more stable returns. For example:

Balanced Advantage Funds: These funds automatically shift between equity and debt based on market conditions. They can offer a more balanced risk-return profile, making them less volatile compared to PSU-focused funds.

Debt Funds: For those who want to focus on stability, debt funds offer consistent returns with lower risk. They are a good way to generate steady income while reducing exposure to volatile sectors.

By reallocating some of your SIP into more balanced or debt-oriented funds, you can manage your risk more effectively without exiting the market altogether.

Regular Review of Your Portfolio
It’s essential to periodically review your portfolio and see how different funds are performing. While PSU funds might not be delivering now, regular assessment with the help of a Certified Financial Planner can provide you with insights on whether to hold, switch, or reduce your investments.

If the overall performance of your portfolio is aligned with your long-term goals, a short-term dip in PSU fund performance might not be a reason to panic. Staying invested through market cycles is often the best way to grow wealth over time.

Final Insights
In summary, your investment in PSU funds might be showing negative returns now, but that doesn’t necessarily mean it’s time to exit entirely. Here’s a quick action plan:

Evaluate the Fund’s Long-Term Performance: Don’t make decisions based on short-term dips. Look at the track record and sector outlook.

Consider Reducing, Not Stopping: Reduce your SIP to Rs. 5,000 rather than stopping entirely. This keeps you invested while freeing up money for other options.

Diversify Into Actively Managed Funds: Use part of your investment in actively managed funds for more stability and potential growth. Avoid direct mutual funds and index funds due to their limitations.

Reallocate to More Stable Funds: Consider adding balanced advantage or debt funds to reduce volatility.

Review Regularly: Keep assessing your portfolio’s performance with a CFP to stay on track.

By following these steps, you can make a more informed decision about whether to continue, reduce, or stop your SIP in PSU funds.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Instagram: https://www.instagram.com/holistic_investment_planners/

Ans: Hello;

If your investment horizon is long-term then you shouldn't be concerned about such short term volatility.

Also as far as possible keep exposure to sectoral and thematic funds/ETFs to the minimum.

Happy Investing;