This 58-year-old invests Rs 50,000 in 8 mutual funds. Expert flags portfolio imbalance, suggests rejig

Choosing the right mutual funds is only one part of building a long-term investment portfolio. As investors approach retirement, it becomes equally important to review asset allocation, diversification and the level of risk being taken. Holding several mutual funds does not necessarily mean a portfolio is well diversified, especially when multiple schemes have similar market-cap exposure or belong to the same fund house.

A portfolio review can help investors identify overlapping investments, excessive exposure to a particular market segment and gaps in asset allocation. It can also help determine whether the existing SIP strategy is aligned with the investor's financial goals and time horizon.

A 58-year-old investor, who is currently investing Rs 50,000 every month through SIPs across eight mutual funds, reached out to ETMutualFunds as he wants to build wealth over the long term and is willing to take risks. He has also sought guidance on the best mutual funds to invest in every month with a monthly investment of Rs 50,000.


Also Read | Silver gave 98% returns in 1 year, but investors made just 18%; 56% investments in loss: Report

He currently invests in funds such as Nippon India Mid Cap Fund, Invesco India Mid Cap Fund, Bandhan Small Cap Fund, Invesco India Small Cap Fund, Invesco India Large and Mid Cap Fund, Axis Multi Cap Fund, Motilal Oswal BSE Midcap 150 Momentum 30 Index Fund, and ICICI Prudential Nifty EV & New Age Auto Fund.

Expert, Adil Chacko, Executive Director, Anand Rathi Wealth Limited analysed the portfolio and shared with ETMutualFunds that the priority at this stage should be to assess the accumulated corpus and review the overall portfolio rather than simply increasing exposure to high-risk assets.

Since the investor is 58, his approaching retirement also makes asset allocation and liquidity particularly important, the expert said.

The expert recommends dividing investments into three buckets based on when the money may be required. The long-term bucket, which can remain untouched for seven to 10 years, can focus on growth and have a higher allocation to equity. The medium-term bucket, with a two- to three-year horizon, can have a mix of equity and debt, with a 50:50 or 60:40 allocation depending on the investor's risk profile. The short-term bucket should be invested entirely in debt to meet liquidity requirements for the next two years.

For debt investments, the investor's tax slab and investment horizon should also be considered. According to the expert, if an investor is in the highest tax slab and has an investment horizon of more than one year, arbitrage funds can be considered. Investors in lower tax slabs may consider fixed deposits or debt mutual funds such as target maturity funds.

High exposure to mid and small caps

Out of eight funds in the portfolio, five funds in the portfolio are from the mid and small cap category.

The expert believes the portfolio has a significant tilt towards mid- and small-cap stocks. The suggested market-cap allocation is 55% large cap, 23% mid cap and 22% small cap. Against this, the investor is currently under-allocated to large caps by around 29%, while being over-allocated to mid caps by around 19% and small caps by around 10%.

This means the portfolio is taking more equity-market risk than may be necessary for someone approaching retirement. Although the investor has said he is willing to take risks, the expert believes risk-taking should be balanced with the need to protect the accumulated corpus and meet future retirement requirements.

Invesco India Mutual Fund exposure also needs a review

The investor has eight funds in the portfolio out of which three are from Invesco India Mutual Fund. The portfolio also has significant concentration in one fund house.

The investor's overall allocation to Invesco Mutual Fund is around 38%, which the expert believes may warrant a review. Diversifying across fund houses can reduce dependence on the investment strategy and portfolio decisions of a single asset management company.

Also Read | Gold looks expensive at current levels, silver still undervalued: Monarch PMS

The expert has also suggested capping investment in each individual mutual fund at around 10% to avoid excessive concentration. This can help ensure that the performance of one scheme does not have an outsized impact on the overall portfolio.

Which mutual funds should the investor hold?

The expert has suggested continuing with Nippon India Growth Mid Cap Fund, Invesco India Smallcap Fund and Invesco India Large & Mid Cap Fund. Nippon India Growth Mid Cap Fund delivered 10.22% over one year, 18.64% over three years and 18.29% over five years.

Invesco India Smallcap Fund delivered 17.62% over one year, 21.93% over three years and 19.26% over five years. Invesco India Large & Mid Cap Fund delivered 9.82% over one year, 22.19% over three years and 16.71% over five years.

The recommendation to hold these funds should be viewed in the context of the overall portfolio rather than their past returns alone. Portfolio allocation, diversification and the investor's time horizon remain important considerations, the expert said.

Which mutual funds should the investor exit?

The expert has recommended exiting ICICI Prudential Nifty EV & New Age Automotive ETF, Motilal Oswal BSE Midcap 150 Momentum 30 Index Fund, Axis Multicap Fund, Invesco India Midcap Fund and Bandhan Small Cap Fund.

The suggested changes would reduce exposure to thematic, momentum, mid-cap and small-cap strategies and create room for greater diversification across market segments.

The expert has also advised avoiding excessive exposure to momentum funds. Such strategies can perform strongly during favourable market cycles but can also go through periods of underperformance. The expert has further suggested avoiding index funds and ETFs in this portfolio, as they are passive strategies and do not seek to generate active alpha.

Which mutual funds can the investor consider for fresh investment?

For fresh investments, the expert has suggested Quant Large Cap Fund, ICICI Prudential Dividend Yield Fund, HDFC Flexi Cap Fund and Kotak Multicap Fund. These funds can increase the portfolio's exposure to large-cap, dividend-yielding, flexi-cap and multi-cap strategies and help address the current tilt towards mid- and small-cap stocks.

The objective is not necessarily to add more funds to the portfolio but to improve its overall asset allocation and diversification. For an investor nearing retirement, a smaller number of well-chosen funds may be easier to monitor than a large portfolio with overlapping exposures, the expert said.

Can a step-up SIP help?

The expert estimates that if the investor continues investing Rs 50,000 every month for 10 years and earns an assumed annual return of 13%, the investment could grow to around Rs 1.22 crore. However, these are only projections and actual returns can vary depending on market conditions.

A 10% annual step-up in the SIP could significantly increase the potential corpus. Under the same 13% assumed return and 10-year investment period, increasing the SIP by 10% every year could take the projected corpus to around Rs 1.71 crore. The higher corpus would come from the additional contributions as well as the compounding of those investments.

Also Read | SIFs attract Rs 22,328 crore since launch. Should mutual fund investors use them as satellite allocation?

Investments in stocks every month?

The investor has also sought guidance on investing Rs 50,000 every month in five to 10 stocks for the long term. However, the expert's recommendations primarily focus on restructuring the existing mutual fund portfolio and creating appropriate equity, debt and liquidity buckets rather than adding another Rs 50,000 allocation to direct equities.

For an investor approaching retirement, adding a significant direct-equity allocation to an already equity-heavy portfolio could further increase concentration and volatility. Before investing in individual stocks, the investor should first determine how much of his overall portfolio can be allocated to high-risk assets without compromising retirement needs.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get them answered by our panel of experts. Do share your questions at ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle.