I stopped my SIP in small cap. Is it a wise decision?

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I am currently investing through SIPs and have been investing Rs 10,000 every month for the past 2 years. My investment horizon is seven years.

ELSS funds:
Rs 2,000 in DSP Tax Saver Fund - Direct Plan
Rs 2,000 in Axis Long Term Equity Fund - Direct Plan
Rs 2,000 in Aditya Birla Sun Life Tax Relief 96 - Direct Plan
Rs 2,000 in ICICI Prudential Long Term Equity Fund - Direct Plan

Rs 1,000 in SBI Small Cap Fund - Direct - Growth
Rs 1,000 in Tata Digital India Fund Direct - Growth

I have two questions:
One, Have I diversified my ELSS portfolio too much by investing in four different schemes?
Two, I have stopped my non-ELSS fund investments because of COVID-19 and due to the small cap exposure. Is it a good decision?

You have not mentioned your risk profile. So, it is not possible to comment about your mutual fund portfolio.

You need only one or two ELSS or equity linked saving scheme (also known as tax saving mutual fund scheme) in your portfolio. In fact, an average investor do need more than four or five schemes, including tax saving schemes, in his or her mutual fund portfolio.

  • 4.43%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 2.8 YearsTime taken to double money
  • 3.88%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 3.8 YearsTime taken to double money
You have committed one of the most common mistake done by average investors. Stopping investments during a market fall or bear phase is a wrong strategy. In fact, a fall or bear phase allows you to buy more units of the scheme. This is what helps you to average your purchase cost and earn more units, and maximise wealth over a long period. Just imagine, you were ready to buy stocks when they were quoting higher price, but not ready to buy them when they are available 20-30% cheaper. In fact, investing through an SIP tries correct this anomaly.

Your current predicament clearly shows that you do not have the risk-taking capacity to invest in small cap schemes. The small cap segment is extremely risky and volatile. That is why they are recommended only to very aggressive investors. However, many investors wrongly assume that they have very high risk appetite when there is a bull market. They realize their mistake only during a sharp fall or bear phase in the market.

If you do not understand much about mutual funds, seek the help of a mutual fund advisor. It is not wise to play with your hard-earned money in the stock market.

Ideally, you should choose mutual funds based on your financial goals, investment horizon, and risk profile. For example, if you are a conservative investor with an investment horizon of five to seven years, you should invest in large cap schemes. If your risk profile is moderate, you should invest in multi cap mutual funds. Aggressive investors can opt for mid and small cap schemes. Choosing a scheme that matches the risk profile is extremely important. Otherwise, you would panic and abandon your investments when the markets gets into a rough patch.
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