Mututal Funds - Sometimes confusing Vikram, 23 Jan 2014

Dear Sir, I have been investing around 37K/month in MFs for achieving 3 of my long term goals which are placed 10, 20 and 26 yrs apart. My portfolio has 7 funds with 2 Large caps, 2 diversified/balanced, 2 mid-cap/small cap and 1 international fund. I am aware that it is burdon to manage the portfolio with multiple funds but please clarify my hypothetical yet very much possible doubt. Say if I bring it down to only 3 MFs (1 LC,1 MC/SC,1 Balanced) and say my LC fund consistently under-performs compared to the benchmark/peers for a year or more. Most of the financial notes advices to stop further SIPs and pick up some other well performing fund. My point is, if I have only 1 LC fund, my entire investment for all those years would be a dead investment, if I have to switch to a new fund altogether. The new fund time hrizon will automatically be reduced. Is my understanding correct ? That is the reason I have chosen 2 in each category selecting the best performing funds matcihng my risk profile. This will help me stop SIP in one and bump up the SIP in another fund and still keep my investment intact. Yes, this isn't full proof but I get the sense of some guard against losing the time. Please suggest, if there is a better way. There is a possibility that I might have completely mis-understood the statement "Exit from continuously under-performing fund". I am confused. Help me.

Fintotal Answer

  Hi Vikram. All your goals are long term. Inflation is the major casue of worry in long term and hence while planning for long term investments one must invest in inflation beating products. Equity diversified mutual fund has the potential to beat inflation and all your investment should go in it. One well performing equity diversified fund gives you all the needed diversification. Mutual fund itself is a diversified product with about 20 stocks in a fund. More mutual funds in same category does not add to any diversification.  Investing in mid/small cap fund is better if done directly in stocks instead of taking a mutual fund route. Mid/small caps are suitable for wealth creation rather than core goals achievement. Balanced mutual funds are suitable for medium term goals say those which you want to achieve between 3 and 5 years. So for your goal, equity diversified mutual funds are best suited. Most of the well performing mutual funds do invest in similar well performing stocks. So you need not worry that holding just one fund would be risky. When you think the fund is consistently performing bad you may disontinue the SIP. Discontinuing SIP means to stop investing in that fund but it does not mean redemption of fund. Your fund units remain active in the fund even when you stop SIP. When you wish to switch to other well performing fund at certain point of time, you can redeem the previous fund and put that money in the new investment and divert SIP in new investment . By this, your investment will not go dead and you would enjoy the returns getting compounded on the accumulated value. Also, there is no harm in keeping two large cap funds. You can do so but it won't really make any significant difference.  

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