What factors to consider when choosing the right fund to invest in?

I am 36 years old and my goal is long-term wealth creation. My risk profile is aggressive. I have shortlisted a few funds based on market cap, fund manager, fund house and portfolio overlap. The shortlisted funds are - Axis Growth Opportunities Fund, Parag Parikh Flexi Cap Fund(international exposure with value style), Kotak Multicap Fund, Quant Active Fund (Multicap), Canara Robeco Small Cap Fund and PGIM India Small Cap Fund. I have not included large cap and midcap funds as they should largely be covered by above funds. Do I need to make any changes to the portfolio? I have a tax harvesting query too. From a returns perspective, will it have a huge impact if I redeem when goals are nearer viz-a-viz taking advantage of the Rs. 1 lakh limit and reinvesting? 

- Ejaz T

While choosing funds, factors such as portfolio overlap, fund house diversification etc. are important but secondary to factors such as longevity of the fund and consistency of returns across market cycles. In your list of funds, two funds (Kotak and PGIM) were launched less than a year ago and hence have not really proved their performance in the market yet. Also, multi-cap funds in general are of recent vintage (launched post SEBI clarification on what this category entails), and can be substituted with flexi cap funds at this stage. As options, you can try Axis Midcap Fund, SBI Small Cap Fund, and Canara Robeco Flexi Cap Fund in your portfolio.

Regarding tax harvesting, if I understand your question correctly, you are asking if returns from the portfolio can be reinvested annually (up to ₹1 lakh), since this withdrawal would not be subject to tax. For any serious long-term portfolio such a strategy would yield marginal dividends, if any. Also, this tax concession might go away in any budget which means that this is not a sustainable strategy over the long term. Waiting for the goal to get nearer and reallocating your portfolio to more and more debt and liquid funds every passing year would be the prudent strategy.

Srikanth Meenakshi is co-founder, PrimeInvestor. Send in your queries at mintmoney@livemint.com and get them answered by industry experts.