Your Fund Portfolio

Deepak Kumar

Owning a portfolio that is made up entirely of small-cap equity funds is a bad idea for three reasons. One, if small-cap funds deliver out-sized returns in bull markets, they also ruthlessly batter your net worth in bear markets. Over the long term, these two often even out to ensure that small-cap funds deliver better returns than other categories of equity funds. But there are no guarantees, and the risk-reward may not always be favourable.

Looking back on the trailing 10-year returns on different equity categories today (June 13), small-cap equity funds have delivered a CAGR of 15.5 per cent, but mid-cap funds have bettered them at 16.6 per cent despite taking on lower risks. Multi-cap funds have managed 13.2 per cent. You need to evaluate if the additional 2.3 per cent return on small-cap funds is worth all the short-term pain they subject you to.

Two, small-cap funds suffer such big setbacks in adverse markets that investors in them need great equanimity to hold on to them for the long term. It is easy to overestimate one’s risk appetite in a market where small-cap funds have delivered a 15 per cent CAGR in the previous five years, but a sharp fall could test your ability to handle capital losses. Small-cap equity funds have corrected by 9 per cent in the last one year, but in the 2008 meltdown, the category lost 57 per cent and many small-cap funds were down 60-70 per cent.

Three, holding many small-cap funds in your portfolio can dilute your returns owing to portfolio overlaps and sub-optimal fund choices.

Keeping the above factors in mind, it would be best for you to switch to a more balanced asset allocation spread across multi-, mid- and small-cap equity funds. Multi-cap funds will give you tactical allocations to mid- and small-cap stocks and mid-cap funds will help you own emerging companies with better chances of scaling up. You can divide the ₹16,000 equally among HDFC Equity (multi-cap), ICICI Prudential Next 50 (passive mid-cap), Franklin India Prima (mid-cap) and L&T Emerging Business. It would also be best to switch your investments so far into these fund categories for a better risk-reward ratio.

You mention that you already have investments in PPF, gold, land and FDs, and therefore we assume that you don’t need additional debt allocations. You can hold on to a lump sum to deploy in corrections. But you need to have a separate emergency fund to meet your living expenses in case of a temporary job or income loss. This money needs to be invested in safe avenues such as fixed deposits.

We would not recommend investing in individual stocks for retirement.It is extremely difficult to predict which companies in the listed universe will survive business and economic cycles for the next 30 years. Investing directly in stocks requires not just knowledge and the ability to assess businesses and balance sheets, but also a lot of time and effort in regularly monitoring your portfolio and replacing companies that are seeing deteriorating fundamentals or governance. If you are keen to invest directly in the stock market, we suggest you start small, making lump-sum investments in good-quality stocks and refining your investment strategy as you go along.

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