MF Query Board

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I have a monthly SIP of Rs10,000 in Mirae Asset Large-Cap Fund and Rs5,000 each in SBI Small-Cap Fund and Axis Mid-Cap Fund. I want to accumulate Rs1.5 crore in another 20 years. I want to know whether it is achievable with the above portfolio.

- Mayank Gupta

The first thing that strikes us is that you have a 100 per cent equity portfolio. And this might be due to the longer investment horizon. However, it is not just investment horizon-based on which you should decide your asset allocation but also your risk appetite. If you have assessed it before investing, then it might be an aggressive risk profile. Furthermore, we would be answering your query setting your return expectations right by understanding what kind of returns large-cap, mid-cap and small-cap funds can give by analysing the price data for their respective indices. For this we would be calculating five-year rolling returns for large-cap, mid-cap and small-cap. Moreover, we have taken Nifty 100 TRI, Nifty Mid-Cap 100 TRI and Nifty Small-Cap 100 TRI as representatives of large-cap, mid-cap and small-cap funds. The price data is for 10 years from April 2011 to March 2021.

The above two graphs would clearly show you the five-year rolling returns of large-cap, mid-cap and small-cap indices. With this we can safely assume that large-cap, mid-cap and small-cap over a longer horizon are likely to give returns of 12 per cent, 15 per cent and 12 per cent, respectively. In case of small-cap the returns would be even higher if we look at 10-year rolling returns. Further, we assume that you receive the compounded annual growth rate (CAGR) on funds mentioned in the query similar to the average five-year returns provided by the respective category indices.

Your present asset allocation is 50 per cent towards large-cap and 25 per cent each towards mid-cap and small-cap. That said, your overall portfolio returns come at 12.75 per cent. Assuming this being your CAGR for the next 20 years, you are able to accumulate corpus of Rs2.01 crore which is Rs50 lakhs more than what you are actually expecting. So, to answer your question, you would be able to accumulate Rs1.5 crore in 20 years from now with the said asset classes. However, one thing you need to remember is that no fund always remains at its peak and moves through a cycle. Hence, it is crucial to monitor your investments at least annually.

Where should I park my emergency fund without sacrificing on returns

- Ramesh Mantrawadi

Before answering this question let us first understand what an emergency fund is. An emergency fund is nothing but a corpus that would help you financially during rainy days. Say, for instance, there is a loss of job or unforeseen temporary loss of full or partial income as many might have witnessed during the pandemic, an emergency fund stands like a strong financial pillar during such a time. Hence, there is no doubt that everyone must have an emergency fund in place. And while investing for an emergency fund, ask yourself one question in the event of income loss for say three months, six months or even a year: can I afford to have capital loss in my emergency investment corpus?

If the answer is ‘no’ – which most people would have – then invest in such funds where your capital is protected. And when you search for investing in such an investment don’t get demoralised by your investment returns. Remember, protecting capital is much more important than earning handsome returns because you are saving it for any unforeseen circumstance which is not going to give you an alert to get prepared for it. Coming back to the question, if you are seeking investment for your emergency fund needs then we would recommend you not to run behind returns. This is because higher returns attract higher risk. For instance, if you invest in a liquid fund just because it is giving higher returns, then you first need to check its portfolio and the credit rating of the instruments that it is investing in.

Remember, no investment is risk-free. You are even carrying re-investment risk in bank FD and government bonds. Therefore, it is wise to divide your investments among various avenues including bank fixed deposits (FD) and savings bank account. Let us understand this with the help of an example. Let us assume that your monthly fixed expenses work out to about Rs20,000 and as per your occupation you need to keep six months of expenses in your emergency fund. This means that in total you should at least have Rs1.2 lakhs as your emergency corpus which should be revised annually to adjust for your expenses. Therefore, this Rs1.2 lakhs can be invested in different avenues. For instance, keep Rs40,000 in liquid funds, Rs50,000 in bank FD and Rs30,000 in savings bank account.