Need Expert Advice?Our Gurus Can Help

Ramalingam Kalirajan |7376 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 05, 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 Siddharth on Oct 05, 2024

Sir, I have started a SIP of 1000 Rs. per month in the below Mutual Funds since August 2024. I have planned to invest in it for a period of 10-20 years. Am I going the right way and whether my mutual fund selection for SIP is good or not? I need your guidance and instructions on it please. 1) UTI Nifty 50 Index Fund (Large Cap) 2) Kotak Emerging Equity Scheme (Mid Cap) 3) Nippon India Small Cap Fund 4) SBI small Cap Fund Request for your reply sir Thanks

Ans: Your decision to start SIPs is a positive step towards building wealth in a disciplined manner. Systematic Investment Plans are the best way to invest for long-term goals because they minimize market timing risks and benefit from the power of compounding. Now, let's assess the mutual funds you've chosen.

1. Selection of Mutual Funds
You’ve invested in a good mix of large-cap, mid-cap, and small-cap funds. This diversification will help balance risks and returns, as different market segments perform differently over time. However, let’s analyse each category for a better understanding.

2. Large Cap Fund: Focus on Stability
Large Cap Funds: You have selected a large-cap index fund, which provides exposure to stable and financially strong companies. While large-cap funds are less volatile, index funds are passively managed. It means they mimic the benchmark index, which offers average returns in line with the market.

Limitations of Index Funds: Although index funds offer low expense ratios, actively managed large-cap funds can provide better returns. An experienced fund manager can outperform the index by selecting high-potential stocks. You might miss out on such opportunities with an index fund.

3. Mid Cap Fund: Balanced Growth Potential
Mid-Cap Fund: Your choice of a mid-cap fund is a good addition for growth. Mid-cap funds invest in companies with strong growth potential, though they can be volatile in the short term. Over the long term, mid-cap funds often outperform large caps but may carry higher risks.

Recommendation: Keep investing in this category for 10-20 years, as mid-caps will provide significant growth over time if held patiently.

4. Small Cap Funds: Higher Returns with Higher Risks
Small-Cap Funds: You’ve invested in two small-cap funds, which could provide the highest returns but also come with higher volatility. Small-cap funds invest in companies that are still in their growth phase, and therefore their performance can fluctuate significantly.

Diversification Risk: Having two small-cap funds might expose your portfolio to excessive risk. Instead of having multiple funds in the same category, you can consider reducing small-cap exposure and adding a balanced or multi-cap fund for better risk management.

5. Your Portfolio Diversification
Diversified Portfolio: Your portfolio has a good mix of large, mid, and small-cap funds. However, it leans more towards small-cap funds, which could increase risk over time. If you're investing for a period of 10-20 years, having a combination of large-cap (for stability), mid-cap (for growth), and a small allocation to small-cap funds will work well.

Suggestions for Optimizing Your SIP Investments
Increase Large-Cap Allocation: While your large-cap investment is in an index fund, you might want to switch to an actively managed large-cap fund. This could provide better risk-adjusted returns in the long term.

Balanced Approach: Instead of having two small-cap funds, consider reducing your exposure to small-caps. You can add a balanced or hybrid fund to bring more stability. A diversified equity fund could also serve you well.

Gradual Step-Up: As you continue investing over the years, it's important to increase your SIP contributions annually. A 10% increase in your SIP every year can help you achieve your financial goals much faster.

Final Insights
Mutual Funds for Long-Term: Your investment horizon of 10-20 years is ideal for SIPs in equity mutual funds. Equity markets perform well over the long term and SIPs help average out the cost of investment.

Rebalancing Every 2-3 Years: Keep an eye on your portfolio and review it every 2-3 years. Make sure your portfolio stays aligned with your risk tolerance and financial goals. Rebalancing can help you lock in profits from certain funds and reinvest in others.

Active vs. Passive: While your index fund choice gives market-average returns, you might benefit more from actively managed large-cap funds in the long run.

Small Cap Exposure: Reduce your exposure to small-cap funds, as they carry more risk. Having one small-cap fund is usually sufficient for the average investor. Consider adding a balanced or multi-cap fund for more stability.

Continued Discipline: Investing for 10-20 years requires patience. SIPs take time to deliver their full potential, especially in volatile markets. Stay disciplined, and avoid pausing or stopping your SIPs based on market fluctuations.

By following these steps and making small tweaks, you can create a more balanced and growth-oriented portfolio. Keep a long-term perspective and regularly increase your investments to reach your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Asked on - Oct 09, 2024 | Answered on Oct 09, 2024

Sir, Based on your suggestions I have decided to start SIP in the below MFs: Large Cap 1. ICICI Prudential Bluechip Fund- 500 Rs. per month 2. SBI Bluechip Fund- 500 Rs. per month 3. Nippon India Large Cap Fund- 500 Rs. per month 4. HDFC Top 100 Fund- 500 Rs. per month Total Amount : 2000 Rs. per month Balanced Fund 1. ICICI Prudential Equity & Debt Fund- 500 Rs. per month 2. UTI Aggressive Hybrid Fund- 500 Rs. per month Total Amount: 1000 Rs. per month Multi Cap 1. Nippon India Multi Cap- 500 Rs. per month 2. Quant Active Fund- 500 Rs. per month Total Amount- 1000 Rs. per month Your observations on the above please? Should I start my SIP with the above proposed portfolio??

Ans: Your proposed portfolio covers large-cap, balanced, and multi-cap categories, which is a good starting point for diversification. However, each mutual fund category and fund selection needs to align with your long-term goals, risk tolerance, and the current financial landscape.

Before proceeding with this portfolio, consider these key points:

Fund Overlap: Investing in multiple large-cap funds could result in overlapping of the same stocks, as large-cap funds generally invest in similar companies. This could limit diversification.

Balanced Funds: Your balanced funds, which mix equity and debt, are suitable for some stability. However, it’s essential to check if they match your risk-return profile and goals for stability versus growth.

Multi-Cap: Multi-cap funds offer diversified exposure across market caps, which is good for long-term growth. However, ensure that you are comfortable with the inherent volatility they can bring.

To ensure the best fit for your goals and preferences, it's advisable to consult with a Certified Financial Planner (CFP) or a Mutual Fund Distributor (MFD). They can provide a tailored and comprehensive plan, considering factors like:

Your overall financial goals.
Investment horizon.
Risk appetite.
Fund performance consistency.
This personalized advice can help you structure a portfolio that balances growth and safety effectively.

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.