MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

I am writing to your MF Query Board section for the first time.

I have started investing through MF in SIP mode @ Rs. 1,000 in each fund from October 2018. My investments are as follows:

1) ABSL Small Cap Fund,
2) HDFC Small Cap Fund,
3) L&T Emerging Business Fund,
4) SBI Small Cap Fund,
5) Invesco India Mid Cap Fund and
6) L&T Mid Cap Fund.

With my present financial condition, I hope to continue it for one year. For the next one year, I have planned to invest @ Rs. 2000 each and for the next one year @ Rs. 3000 in each of the fund. After that, I want to hold the total investment for another 5 years.

My first query is: after the total investment period (approx 8 years), how much return can I expect? My goal is to beat the inflation convincingly. Secondly, are my choice of funds right for generating maximum return from small-cap and mid-cap MF categories? I regularly invest in large cap stocks directly in equities, that's why I did not choose any large-cap MF.

- Alokmay Jana.

You have not mentioned why you require this money 8 years down the line. You have said that the only goal is to beat the inflation. So, we assume you are investing only for wealth creation purpose and not for any financial needs or financial goals. You have mentioned that currently you are doing total SIP of Rs. 6,000 per month. From next year, that is from October 2020, you will increase the SIP for one year to Rs. 2,000 in each fund, which brings the total SIP to Rs. 12,000 per month. Then, for the next year, that is from October 2021, you will increase the SIP for one year to Rs. 3,000 in each fund, which brings the total SIP to Rs. 18,000 per month. Thereafter, you will stop all the SIPs and remain invested in those funds for the next 5 years.

Now let us find solution for your query.

Firstly, we would like to point out that you have held too may funds in each category, which is not actually required. This would result in over-diversification and may also pose concentration risk as your collective stock allocation can be more towards a single stock. Let's take your small-cap funds, which collectively invests in 140 stocks, and have major concentration into financial and capital goods sector. So, for appropriate diversification, you do not require more than two funds, which you have in the case of mid-cap funds.

Now to address your query, let us take up one by one.

You have asked how much returns can be expected from this investment. Taking a conservative approach, it can be expected that the small-cap would probably give returns of around 18 per cent and mid-cap would probably give returns of around 15 per cent. Though it is to be noted that the expectations do change from time to time. So, you need to review your portfolio periodically, say every quarter, and revise annually.

Your investment will grow in the following manner.



This would be very tricky to answer whether the selected funds can give you maximum returns in the mid-cap and small-cap space, because the market scenarios are dynamic and the investment philosophies of the fund can perform or cannot perform in all the scenarios. So, here you need to understand that there is nothing called best funds. You can only have funds that suit your risk profile and financial objectives. To get the most out of small-cap funds, you should have a minimum time horizon of 10 years, and for mid-cap funds, it must be 8 years. It is also to be understood that mutual fund returns are not magic numbers and neither are mutual funds managed by magicians to give you always the best. The problem with an expected return is that it is expected something like:




So, it is really very crucial to have reasonable expectations. If someone is guaranteeing you returns, then he/she is fooling you. Even SEBI has directed intermediaries that they cannot guarantee returns. As the products are market-linked and markets cannot be predicted, no one can guarantee you returns.

One more thing is that having an equity only portfolio is risky. As the age-old adage goes, 'Never put all your eggs in one basket'. Likewise, don't invest all your investments in one asset class. Inter-asset diversification is fine, but you also need to diversify across other assets based on your risk profile. Investment is something which comes into picture in the later part. Initially, you need to streamline your cash flows, build an emergency fund, manage your risks with insurance, start investment for retirement and then move on to other financial goals or wealth creation. So, whatever advice or suggestion that we have given is based on the fact that you have already done with the abovementioned things. It is always advisable to hire a qualified financial planner and get all things right before starting investment.