Do I need to change my current allocation to mutual funds?

I have been investing ₹27,000 every month in mutual funds for the last two years. These include ₹3,000 in Nifty Index, ₹8,500 in small-caps, ₹4,000 each in flexi-caps, mid-caps, and multi asset fund, besides ₹2,000 in balanced advantage fund and ₹3,000 in an equity linked savings scheme (ELSS). Do I need to make any changes in my current portfolio?

—Ganesh

Your current portfolio is skewed towards small-cap funds. Currently, small-cap and mid-cap funds are performing very well but these are very volatile. There are also concerns about the stretched valuation in this space.

It would be prudent to reduce the allocation to the small-cap space and increase allocation to the large- or flexi- cap funds. You can add to your existing funds in the Nifty Index and flexi-cap category.

Do maintain an emergency corpus equivalent to six months of your salary/income. This fund can be kept in liquid or ultra short mutual funds.

I am a new investor. What are the risks and return potential in thematic and sector-based funds?

—Name withheld on request

Thematic and sector-based funds focus on specific industries or themes, offering the potential for higher returns when those sectors perform well. However, they also come with unique risks.

Concentration risk: These funds are more concentrated, so if the chosen sector/theme underperforms, it could significantly impact investments.

Cyclical nature: Sectors can go through cycles of boom and bust, affecting fund performance.

Market timing: These funds may require a good understanding of market trends and cycles to time entries and exits effectively.

Volatility: Thematic funds can be more volatile than diversified funds, leading to potential higher upsides but also greater downsides.

Higher expense: Most actively managed thematic/ sectoral funds have higher expense ratio as compared to diversified funds.

Investments in sectoral funds need constant monitoring of your investments and sector that you have invested in.

Considering you are a new investor, we would suggest that you continue investing in diversified funds and as and when you build confidence and understanding about the market and sectors, you can start allocation to those funds.

Vijay Kuppa is chief executive officer of InCred Money.