This is particularly important when an investor has multiple long-term goals such as a child’s education, house construction, retirement and marriage. As the goal approaches, the portfolio also needs to gradually become more conservative to protect the accumulated corpus from a sharp market fall.
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A 36-year-old working professional from Coimbatore who is investing Rs 30,000 every month through systematic investment plans (SIPs), with a 10% annual step-up reached out to ETMutualFunds as he wants to balance capital protection with long-term wealth creation and also follows a moderate-to-aggressive investment approach.
His current SIP portfolio includes funds such as Parag Parikh Flexi Cap Fund, ICICI Prudential Equity & Debt Fund, SBI ELSS Fund, Mirae Asset Large & Mid Cap Fund, Edelweiss Mid Cap Fund, DSP Multi Asset Allocation Fund, Quant ELSS Fund, Nippon India Small Cap Fund, Bandhan Small Cap Fund. All these are in direct plan and he has also invested in Sukanya Samriddhi Yojana and provident Fund.
He has already taken term insurance and family health insurance and maintains an emergency fund equivalent to eight months of family expenses.
Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance analysed the portfolio and told ETMutualFunds that the investor has a financial planning problem before he has a mutual fund selection problem.The expert said that the biggest concern is the investor’s retirement target of Rs 1 crore after 22 years. The expert believes this target may be significantly inadequate and should be calculated based on his expected retirement expenses rather than being treated as a round figure.
For example, an expenditure of Rs 50,000 per month today, assuming 6% annual inflation, would rise to roughly Rs 1.8 lakh a month in 22 years. If retirement begins at that point and the investor plans for a long retirement extending to around age 90, a Rs 1 crore corpus could be grossly insufficient.
Based on the assumptions provided by the expert, the retirement corpus requirement could be more than Rs 6 crore. This calculation is only illustrative because the actual requirement would depend on factors such as current household expenses, retirement age, expected post-retirement returns, inflation, life expectancy and other sources of retirement income.
The expert also points out that there is no information about the investor’s existing EPF balance, annual contributions or the corpus that may accumulate through his provident fund. These details need to be included before arriving at a realistic retirement number.
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Too many funds for a Rs 30,000 monthly SIP
The investor currently has exposure to 10 investment avenues, including two ELSS funds and two small-cap funds. For a Rs 30,000 monthly SIP, the expert believes this makes the portfolio unnecessarily complicated.
Having several schemes does not automatically mean better diversification. Multiple funds can invest in similar companies, sectors and market segments, resulting in overlap without adding meaningful diversification.
A more streamlined portfolio, with a diversified core and limited satellite exposure to small caps, can be sufficient for an investor with a moderate-to-aggressive risk profile.
The two small-cap funds in the portfolio are therefore not considered necessary. The investor already has exposure to equity through flexi-cap, large-and-mid-cap and other diversified funds. Adding two separate small-cap schemes to a Rs 30,000 SIP can increase portfolio risk without necessarily improving the probability of achieving his goals.
Two ELSS funds may not be necessary
Based on the details given, the expert is investing in both SBI ELSS Fund and Quant ELSS Fund. Whether he needs ELSS exposure at all depends partly on his tax regime and whether he actually needs Section 80C deductions.
Under the new tax regime, investing in ELSS purely for tax-saving purposes may not be necessary. Under the old tax regime, ELSS can provide a Section 80C deduction, but the investor should first consider other eligible contributions.
The expert specifically points out that EPF contributions, Sukanya Samriddhi Yojana and other eligible investments can also contribute towards the Section 80C limit. Therefore, the expert should calculate how much of his existing 80C limit is already being utilised before deciding whether two ELSS funds are required.
If ELSS is retained, there is little reason to hold two schemes for a portfolio of this size. One ELSS fund would generally be sufficient for the tax-saving allocation.
Nearer goals need more attention
Another important issue is the mismatch between investor’s goals and the amount allocated towards them.
His daughter’s college education is the first major goal, with Rs 90 lakh required after 12 years. He currently invests Rs 9,000 a month towards this goal through Parag Parikh Flexi Cap Fund, ICICI Prudential Equity & Debt Fund and SBI ELSS.
The house construction goal comes after 18 years and receives another Rs 8,000 a month through a large-and-mid-cap fund and a mid-cap fund.
In contrast, the daughter’s marriage goal is 26 years away, yet it receives allocations through Quant ELSS, Sukanya Samriddhi Yojana and part of the multi-asset fund allocation. This creates an imbalance in the portfolio.
The goals that arrive sooner need greater funding priority, while the longer-term goals have more time to compound. Simply allocating money across every goal does not guarantee that each target will be achieved.
Goal-wise approach or fund selection: Which is more important?
Instead of selecting a mutual fund first and assigning a goal to it later, the investor should work backwards from each goal.
For the Rs 90 lakh education goal, he needs to determine how much the required amount is expected to grow over the next 12 years and then calculate the SIP required to reach that target. Since this is his earliest major financial goal, the portfolio should gradually reduce equity risk as the target date approaches.
For the house construction goal, which is 18 years away, he has a longer investment horizon and can therefore maintain a higher equity allocation initially. However, the portfolio should again be de-risked as the construction date gets closer.
The marriage goal and gold requirement are 26 years away, giving him considerable time to build the corpus. These goals do not necessarily need aggressive funding at the expense of nearer goals.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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