Fund Query: How good are these funds to reach my short-term financial goal?

I intend to accumulate about ₹10 lakh within six years, till August 2028. For doing so, I intend to invest ₹10,000 per month in SIP form. A CAGR of approximately 10 per cent - 12 per cent should yield an amount close to that I desire.

The idea is to have a combination of funds that will be relatively less volatile and with better capital appreciation ability given the relatively shorter time. I am, thus, thinking of starting two SIPs of ₹5,000 per month each, one in ICICI Prudential Equity & Debt (Aggressive Hybrid fund) and the other in DSP Nifty 50 Equal Weight index fund. I am assuming that the volatility component will be kept in check through debt component and the equal weight Nifty 50 index, while the substantial equity component will provide necessary appreciation. Dynamic Asset Allocation fund was not considered, given their lower returns while mid-cap/small-cap were also not considered, given their higher volatility. Kindly comment on the above choices and provide suggestions as appropriate.

Arpit Rahane

As you have rightly mentioned, a SIP of ₹10,000 a month over the next six years, assuming a 10-12 per cent CAGR, will yield ₹9.81 lakh to ₹10.47 lakh. While this looks achievable, the combination of short time to goal, a big corpus requirement and a limited sum that can be invested every month as SIPs peg up the risk-return quotient for your investment. While six years is not too short a time-frame to invest in equity/equity-oriented funds, it is not too long either. Besides, downside risk to markets now from global headwinds needs to be factored in, though growth expectations for India are still robust. Also, your tight timelines don’t give much room to move to safer avenues closer to your goal to preserve the gains. You have not mentioned the purpose of your savings and how flexible the time to goal is. If you can increase SIPs as you move forward or if you can extend your timeline one-two years beyond six years, the risk quotient can come down. On the other hand, if all goes well and if your funds earn more than the 10-12 per cent envisaged, you will be home.

Coming to the choice of funds, aggressive hybrid funds invest a maximum of 35 per cent in debt, which can cushion a market fall. At the same time, 65 per cent exposure to equities provide the upside. Data from Value Research shows that aggressive hybrid funds as a category have a standard deviation (calculated based on calendar month return for the last three years) of 17.1 per cent vs 21.5 per cent for the large-cap/flexi-cap category, 23.6 per cent for the mid-cap category or 26.4 per cent for the small-cap category. While the standard deviation for the dynamic asset allocation category is lower than aggressive hybrid funds, returns are also lower, as you have rightly mentioned. ICICI Pru Equity & Debt is rated 5-star by BL Portfolio Star Track MF Ratings and is a good choice. Its SIP returns (direct plan) for the last six years now stand at 18.4 per cent vs 12.3 per cent for ICICI Pru Balanced Advantage, its Dynamic Asset Allocation category counterpart.

Equal weight index is where an equal amount of money is invested in every stock in the index. In a market-cap weighted index, the bigger the market-cap of a stock, the higher its weight and hence more money gets invested in this stock. Yesterday’s winners are seldom tomorrow’s and when this rotation happens, the underperformance of the higher weighted stocks impact overall index returns. In a way, an equal weight index avoids this and thus reduces concentration risk. However, equal weight index typically underperforms in polarised market conditions only when some stocks/sectors are leading the rally; a broad-based rally helps this strategy. A SIP of ₹10,000 in the last four years since its launch shows that DSP Nifty Equal Weight Index fund (direct plan) has returned 20.4 per cent. In contrast, DSP Nifty 50 Index fund sports 18.9 per cent returns. You can go ahead with this investment as planned as it suits your need to invest in an equity fund for optimising returns, but at the same time take lower risk, given the limited time on hand.

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