Should I Stay Invested in Quant Midcap, Flexi cap & Infrastructure MFs or Switch?

Ans: Too many funds, saving grace is most are decent funds, try to consolidate into 4-6 funds

Ans: SBI Multi Asset Allocation Fund - Growth is a better option in hybrid multi- asset and Axis Bluechip Fund – Growth is better option in Large-cap

UTI Equity Fund – Growth is a better option in Multi-cap

Sectoral Infra Funds can be avoided; instead diversified equity funds with higher infra exposure can be considered

Rest of the funds are fine.

Ans: Hello & thanks for writing to me. As your goal is long term, equity funds will be a suitable option.

You can consider investing in a mix of Flexi Cap, Mid Cap & Small Cap funds 2 schemes in each category thru SIP's.

Stepping up your SIP every year will help you create a larger corpus.

Ans: Investing in midcap mutual funds has its own charm and challenges. Your decision to switch from one midcap mutual fund to another needs careful consideration. Let's evaluate the various aspects before you take any step.

Three key aspects need to be analysed before switching your fund:

Performance Evaluation

Before switching, it’s essential to review the performance of your current midcap mutual fund over the last 3, 5, and 10 years. Midcap funds, by nature, are volatile and may have fluctuations in short-term performance. However, focus on the long-term performance and consistency.

Look at the fund's performance against its benchmark and peer group. If your current fund has outperformed its peers in the long run, there may not be a need to switch. A short-term dip doesn't necessarily mean the fund is underperforming.

Fund Manager's Expertise

Fund managers play a crucial role in determining the success of actively managed funds. Check the experience and track record of the fund manager who is managing your current midcap fund. If the fund manager has a consistent and reliable track record, it could be better to stick with the fund.

If the current fund has undergone a change in its fund management team, and you feel the new manager lacks the experience or expertise, this could be a valid reason to consider switching.

Expense Ratio and Costs

The expense ratio of the fund is a critical factor. A high expense ratio can erode your returns, especially in the long term. Compare the expense ratios of your current midcap fund and the new fund you are considering. If the new fund offers a lower expense ratio with similar or better performance, it might be a better option for you.

Besides the expense ratio, switching funds may involve exit loads and tax implications. If your fund is under three years of holding, you'll have to pay short-term capital gains tax, which is taxed as per your income tax slab. Ensure the cost of switching does not outweigh the potential benefits.

Actively Managed Funds Vs Index Funds

Since you haven’t mentioned index funds, let me clarify why you should avoid them when looking for midcap investments. Index funds track the market passively and don't have the advantage of a skilled fund manager who can spot opportunities and make necessary changes. Actively managed funds, on the other hand, can offer better returns by responding to market changes. They can outperform index funds during volatility.

Additionally, index funds often don't offer the flexibility needed in midcap investments. Midcaps are volatile, and a skilled fund manager is needed to navigate through market cycles.

Disadvantages of Direct Funds

It’s important to highlight why investing through a Certified Financial Planner (CFP) and choosing regular funds over direct funds can be more beneficial. Direct funds often appear attractive due to their lower expense ratio, but they lack professional advice.

A CFP provides ongoing monitoring, advice, and tailored solutions based on your financial goals. By investing through a Mutual Fund Distributor (MFD) with CFP credentials, you ensure that your investment decisions are backed by expertise, regular reviews, and alignment with your financial plan.

Direct funds can save some costs, but if not monitored properly, you might miss out on critical opportunities to adjust your portfolio during market changes.

Tax Implications of Switching

Switching funds can trigger capital gains tax. When selling equity mutual funds like midcap funds, the new tax regime applies:

Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%.
Short-term capital gains (STCG) are taxed at 20%.
Keep these taxes in mind before making the switch. Ensure the potential tax outgo does not reduce your overall returns.

Risk Profile and Financial Goals

Midcap funds are volatile and suitable for investors with a high-risk appetite. Review your risk tolerance and financial goals before making a switch. If your financial goals have changed, it might be wise to reconsider the category of funds you're investing in. However, if you still have a long-term horizon and can handle short-term fluctuations, sticking to midcap funds makes sense.

But don’t switch just because of short-term underperformance. Midcaps perform well in the long run if you give them time to grow. Ensure your goals align with the midcap category.

Diversification of Portfolio

Before switching to another midcap fund, ensure that your overall portfolio is well-diversified. Investing too much in midcap funds may expose you to high risk. Ensure that you have adequate exposure to other categories like large-cap and multi-cap funds.

A balanced portfolio with diversified assets is crucial for long-term growth and stability.

Exit Strategy and Reinvestment

If you are still convinced about switching, plan a systematic exit strategy. Instead of redeeming your entire investment in one go, you can consider systematic withdrawal plans (SWP) to reduce the tax burden and market impact.

When reinvesting in a new fund, avoid a lump-sum approach. Instead, opt for a systematic transfer plan (STP), which allows you to invest in a new fund in smaller instalments. This can reduce the impact of market volatility and give you better returns over time.

Review Alternative Options

Before you switch, review the alternatives available in the midcap category. Compare different funds based on their risk-adjusted returns, volatility, and consistency. Stick to funds with a good track record and experienced fund managers.

But don’t jump to conclusions by focusing only on short-term gains. Midcap funds require a long-term horizon to bear fruit.

Final Insights

Switching from one midcap fund to another can seem like a wise move when performance dips. However, a more detailed analysis is crucial before making the decision. Here’s what you should remember:

Evaluate the long-term performance of your current fund.
Consider the role of the fund manager and management team stability.
Check the expense ratio, exit load, and taxes involved in switching.
Don't underestimate the benefits of professional guidance through a Certified Financial Planner.
Ensure that your investment aligns with your long-term goals and risk tolerance.
Diversify your portfolio before making any switches.
Taking a well-rounded and informed approach is key to ensuring that your midcap investments continue to grow. Avoid hasty decisions based on short-term fluctuations, and always plan for the long-term benefits.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment