I have been investing in mutual funds for the last seven years via SIPs. I am expecting ₹1 lakh bonus from my company and I would like to invest this lumpsum in either Franklin Smaller Companies or DSPBR Microcap Fund.

Kindly let me know if this is a good idea and also your view on the choice of funds. I have an investment horizon of at least 10 years and high risk appetite.

Mehul Kumar

Both DSPBR Micro cap and Franklin Smaller Companies are chart toppers, finding a place among the top 15 diversified equity funds by returns, over the last one-, three-, five- and 10-year periods. Between the two, the Microcap fund would be relatively more risky, given that it invests predominantly in small-cap stocks, while Franklin Smaller Companies takes a little more exposure to mid-cap stocks. This orientation is also reflected in the choice of their benchmarks – the Nifty Midcap 100 for the Franklin fund vis-à-vis the BSE Small Cap index for DSPBR Microcap. But both your choices are in sync with your high risk appetite.

However, there are two concerns. Given that most mid- and small-cap stocks have had a bull run in the last two years or so, the DSPBR Micro Cap fund is now sized a little over ₹2,352 crore.

This makes it the largest fund in the small-cap category. As the fund size increases, investments in small-cap stocks may become more challenging as these stocks may not offer enough liquidity for big-ticket investments. The fund may, on and off, place some restrictions on inflows as it has done in the recent past or hold cash or perhaps veer more towards mid-cap stocks which may offer more depth. A closer watch on their investment style may be necessary and hence, a readjustment on return expectations from it. Second, small-cap stocks as a category may face corrections in the near to medium term, given their good show since 2014. The BSE Small-Cap index, for instance, now trades at a trailing 12 month PE of 43 times, compared with the Sensex’ PE of about 20 times.

Given these factors, it may be a better idea to not put in lumpsum at this point in time in a small-cap oriented fund, although you have a long-term investment horizon. You can, instead, park the ₹1 lakh in a liquid fund (in the same fund house as your equity scheme) and move it to either one or both the funds you have chosen through a systematic transfer plan every month.

I am 30. My wife and I can together save ₹25,000 per month. Please suggest some funds to generate wealth of ₹40-50 lakh, 10 years from now. I am willing to take moderate to high risk. I am not looking for tax-saving.

S Thenu Annamalai

If you put in ₹25,000 per month and your investments earn a compounded annual return of 12 per cent in the 10-year period, you will end up with a corpus of ₹58 lakh. That is a bit more than what you are actually targeting but you may not actually be home.

The value of ₹50 lakh 10 years later may not be the same as it is today; your needs may multiply and you may require more surplus or your investments may fall short of their return expectations. For these reasons, you can add more sums as and when your investible surplus increases.

At present, you can invest the ₹25,000 as follows: ₹4,500 each in Birla Sun Life Frontline Equity, Kotak Select Focus and Franklin Prima Plus. These are large-cap oriented funds which have a good track record. Another ₹4,000 can be parked in ICICI Prudential Value Discovery, a multi-cap fund.

The remaining ₹7,500 can be divided equally between BNP Paribas Midcap and SBI Magnum Midcap. We have suggested about 55 per cent allocation to large-cap oriented funds and the remaining to mid-cap and multi-cap funds, based on your willingness to take moderate to high risks.

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