Consider reducing exposure to small-cap funds and increasing allocation to large- or flexi-cap funds for a more optimized investment strategy.
Is my current mutual fund portfolio sufficiently diversified?
I have been investing ₹27,000 every month in mutual funds for the last two years. These include ₹3,000 in Nifty Index, ₹8,500 in small-caps, ₹4,000 each in flexi-caps, mid-caps, and multi-asset fund, besides ₹2,000 in a balanced advantage fund and ₹3,000 in an equity-linked savings scheme (ELSS). Do I need to make any changes in my current portfolio?
Your portfolio is heavily focused on small-cap funds. Although small and mid-cap funds are currently performing well, they are also highly volatile. Additionally, concerns about stretched valuations in this sector have emerged.
It would be wise to consider reducing your allocation to small-cap funds and increasing your exposure to large- or flexi-cap funds. You may also consider adding to your existing Nifty Index and flexi-cap category funds.
Ensure that you maintain an emergency fund equivalent to six months of your salary or income. This fund can be kept in liquid or ultra-short mutual funds.
Are Thematic and Sector-Based Funds Right for New Investors?
Thematic and sector-based funds focus on specific industries or themes, offering the potential for higher returns when those sectors perform well. However, they also come with unique risks.
Concentration risk is a key concern with these funds; if the chosen sector or theme underperforms, it could significantly impact investments.
Additionally, these funds are subject to the cyclical nature of sectors, which can go through cycles of boom and bust, directly affecting fund performance. Effective market timing is crucial as these funds may require a good understanding of market trends and cycles to time entries and exits effectively.
Furthermore, thematic funds can be more volatile than diversified funds, leading to potential higher upsides but also greater downsides. It’s important to note that most actively managed thematic/sectoral funds have higher expense ratios compared to diversified funds.
Investments in sectoral funds need constant monitoring of your investments and the sector in which you have invested. Given that you are a new investor, our suggestion would be to continue investing in diversified funds. As you build confidence and understanding about the market and sectors, you can start allocating to those funds. This phased approach can help mitigate the unique risks associated with thematic and sector-based funds while allowing you to gradually explore their potential returns.
