MF Query Board

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I have already invested in Axis Bluechip Fund and PGIM India Mid-Cap Opportunities Fund as large-cap and mid-cap allocation, respectively. However, for small-cap allocation I am confused between Kotak Small-Cap Fund and Quant Small-Cap Fund. Also, please guide me on my large-cap and mid-cap fund selection.

- Rishi Tripath

Here let us first quickly understand your fund selection pertaining to large-cap and mid-cap categories. We believe that for large-cap you should consider investing in an index fund. Investing in an index fund sets you free from constantly tracking the fund and your expectations are also set right

Speaking about PGIM India Mid-Cap Opportunities Fund, this fund is good to hold from a long-term perspective. Its portfolio is quite good and so is the fund manager Aniruddha Naha. Despite investing in just 48 stocks, it has managed to contain the concentration risk. Its top 10 stocks form only 31 per cent of the overall portfolio.

Now, coming to your ultimate question of choosing between the two small-cap funds, we believe you should go with Kotak Small-Cap Fund. You might be comparing them based on their performance. But remember, with Quant Small-Cap Fund, it is easy to fall prey to the recency bias wherein the recent performance catches your attention. When it comes to comparing performance, we believe in consistency. So, we look at rolling returns rather than trailing returns in order to measure consistency. Kotak Small-Cap Fund’s three-year average rolling returns stood at 16.25 per cent, whereas in the case of Quant Small-Cap Fund it is a mere 4.93 per cent. Therefore never take investment decisions based on only the recent performance.

That apart, we would suggest you to have a mix of equity mutual fund and debt mutual fund based on your risk profile. Having a proper asset allocation in place would help you manage risk and also be clear about return expectation.

For emergency fund corpus, I have a target of Rs12 lakhs. Presently, I have Rs5 lakhs in fixed deposits (FD) in bank and the rest I have to build. So, which fund would be good to beat FD returns and still stay safe and easy for withdrawal? I am keeping almost 50 per cent as safe investment and can put the rest in risky avenues to earn higher returns.

- Nidhi Gupta

It is a well-thought decision to have an emergency fund in place as this will help you during sudden contingencies. That said, we hope that you have properly calculated the emergency fund to arrive at a reasonable number. It should not be an ad-hoc figure. If not, then we would suggest you to calculate the same. Remember, when we say emergency fund, our understanding is that money should be available at your disposal without loss of principal amount invested. Hence, return expectations should not be more than 6-7 per cent. In order to calculate the emergency fund, you need to assume at least six months to one year of your fixed expenses. By fixed expenses we mean those expenses that you cannot avoid. This would be your ideal requirement of an emergency fund.

So, we suppose that your requirement is calculated as Rs12 lakhs of which Rs5 lakhs is in bank fixed deposits. Thus, for the remaining allocation of Rs7 lakhs, invest Rs1.75 lakhs each in two liquid funds and two ultra-short duration funds. Your additional query was that as you are investing 50 per cent in safe investments, can the rest be invested in risky assets to earn higher returns? If your emergency requirement is calculated as Rs6 lakhs (50 per cent), then you can very well invest the remaining in a portfolio of equity funds. However, if you wish to invest the remaining proceeds of the emergency fund in risky assets, then we would advise you not to do so. This is because any loss in a risky asset can seriously damage your emergency fund corpus. Hence, your emergency fund corpus should always be in safe assets.