I am a 53-year-old home-maker. I made lump-sum investments in some equity funds in 2018 under the growth option, and currently my returns are below 2 per cent. The rationale was to have returns of about 15 per cent in three years. Please let me know if I should hold or switch. I have invested ₹33 lakh across the following funds: Nippon India Equity Hybrid, Nippon India Large Cap, SBI Bluechip, Kotak Standard Multicap, Motilal Oswal Multicap 35, SBI Magnum Multicap, L&T India Value, ICICI Prudential Balanced Advantage and UTI Equity Savings.

Lakshmi Mohan

Your return expectations, choice of funds and portfolio composition suggest that you could do with the services of a qualified financial advisor.

You haven’t approached your mutual fund investments in the right way.

One, your expectation of 15 per cent return from equity funds in three years is unrealistic. Equity funds, though they may deliver double-digit returns in the long run, do not generate returns in a linear fashion.

Depending on how stock markets perform, they may deliver no returns for several years, fall, and subject you to capital losses in some years and deliver high returns in others, compensating for such phases.

Over a seven- to 10-year holding period, these returns average out to a double-digit compound annual growth rate.

Your returns from equity funds depend on your point of entry, too. Higher the market valuations at which you enter, the more you need to reduce your return expectations. By investing a large sum in equity funds in 2018, you entered equities at fairly high valuations and need to tone down your return expectations to 10-12 per cent. Be prepared to hold on for 7-10 years to get to those returns.

Two, given the bullish market conditions you were investing in and the large sum of ₹33 lakh you have invested, it would have been advisable to use the systematic investment plan (SIP) route rather than lump-sum investments.

SIPs would have helped you phase out your investments over the market fall and average your costs lower, contributing to a better long-term outcome.

Three, the composition of your portfolio shows a 30 per cent allocation to large-cap equity funds, 35 per cent to multi-cap funds, 20 per cent to value funds and about 15 per cent to hybrid funds. Each of these fund categories have different risk-return profiles. Large-cap funds deliver moderate returns with some volatility, multi-cap funds deliver higher returns with higher volatility and hybrid funds may just about get you to a high single-digit return with limited downside. Your portfolio is, therefore, not geared to deliver the kind of returns you are expecting.

Before getting to your fund choices, we suggest that you go back to the drawing board to chart out your investment plans in a more systematic manner. First, specify the financial goals towards which you are investing and the time you have left to attain them. Consider equity funds only for goals that are more than seven years away.

For goals that are just three years away, stick to short-term debt funds with high-quality portfolios.

Two, if your goals are indeed seven-plus years away or you have no specific goals and just seek wealth creation, gauge how much risk you can take in terms of capital losses and decide on your asset allocation (allocation between funds) based on this.

If you can weather a 30-40 per cent capital loss without panicking, you can consider equity funds. If you would like to restrict downside to 10-15 per cent, stick to hybrid funds. If you cannot handle losses at all, you must stay with short-term debt funds or even small savings schemes.

If you decide to invest in large-cap and multi-cap equity funds after such a review, you can replace Nippon India Large Cap with a Nifty 50 index fund and redeem Nippon India Equity Hybrid.

There’s nothing wrong with your other fund choices.

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