Photo: iStock
Photo: iStock

Be prepared for higher volatility when investing in mid- and small-cap funds

  • At the current asset mix with equity assumed to be 30%, your targeted return at best will be 9-9.5% before taxation; hence, you need to push a little to increase your returns over the long term
  • Any equity exposure should be taken with a period of 5 to 7 years horizon and this is even more important for mid- and small-cap funds

Public Provident Fund, PPF, mutual funds, fixed deposits, recurring deposits, small- or mid-caps, fixed income, SIP

I am 29 years old and I have been investing for over a year now. I wish to build a corpus of about 2 crore by the time I am 50 years old. I am currently investing in Public Provident Fund (PPF), where I utilize my entire quota of Section 80C ( 1.5 lakh). I will extend the account for five to 10 years. In mutual funds, I invest 5,000 in ICICI Prudential Bluechip fund and wish to top up with 2,500 each year. I invest in recurring deposits (RDs) and fixed deposits (FDs) too. I don’t have a risk appetite to invest in small- or mid-caps. Do I need to invest more in mutual funds instead of RDs and FDs?

—Harshit Rastogi

Your asset allocation is spread primarily across debt (fixed income)—PPF, bank deposits including RDs—and a large-cap equity mutual fund. As you don’t have a risk appetite and are a low to moderate risk taker, the asset allocation is in order. However, you can consider having debt mutual funds versus FDs and RDs to increase tax efficiency along with multi-cap and large-and-mid-cap equity funds. Large-and-mid-cap is a new category which takes large- and mid-cap exposure of 35% each and the balance 30% is market-neutral. At the current asset mix with equity assumed to be 30%, your targeted return at best will be 9-9.5% before taxation; hence, you need to push a little to increase your returns over the long term.

To give you a perspective, your monthly savings need to be 25,000 over your targeted period of 21 years at 9.5% average return to achieve the desired goal of 2 crore corpus.

I am 24 years old. I invest 2,000 per month each via systematic investment plans (SIPs) in Nippon India Small Cap, SBI Magnum Midcap and Motilal Oswal Multicap 35. I started investing in 2017 and my investment horizon is five years. However, seeing the performance of these SIPs, I wonder if I should switch or stay. Please advise.

—Ashish Jha

It has been more than two years since you started your monthly investments via SIPs. The fund selection is of an aggressive portfolio with a mid- and small-cap bias. There are three schemes—one each in multi-, mid-and small-cap categories. Any equity exposure should be taken with a period of five to seven years horizon and this is even more important for mid- and small-cap funds. You are right that the funds held by you have not performed over the last few years. Even the mid-cap and small-cap indices have performed poorly. At the same time, the funds held by you, especially the multi-and mid-cap schemes, have underperformed within the peer group also. You can consider changing them. If you want a similar portfolio with a mid- and small-cap bias, you should be prepared for a high degree of volatility. Alternatively, you can also consider large-cap or large-and-mid-cap categories.

Surya Bhatia is managing partner of Asset Managers.

Close