Ask Morningstar: Separate goals, Separate portfolios

By Himanshu Srivastava |  14-03-22 | 
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Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

I'm 32. I started investing less than a year ago. My long-term goals are child education and retirement savings. The debt fund is to create an Emergency Fund. Do I need to make any changes to my portfolio? Also, I'm planning to invest another Rs 7,000 in SIP. Which fund would you suggest?

These are my current SIPs: ICICI Pru Tech (Rs 5,000), Mirae Asset Taxsaver (Rs 5,000), Axis Small Cap (Rs 5,000), Edelweiss Balanced Advantage (Rs 7,500), ICICI Pru Short Term (Rs 5,000) and PGIM India Flexi Cap (Rs 6,000).

While your selection of funds is broadly fine, the portfolio doesn’t appear to be a planned one. This is understandable since you are a new investor. It’s good to see that you have prudently opted for the SIP route.

Why a large-cap fund must be a core holding.

Large-cap funds invest in the top 100 listed companies in India. These are largely steady enterprises that form an anchor for any portfolio. Large-cap funds would at any time invest a minimum of 80% in large-cap stocks. Such funds tend to be more stable during challenging times compared to mid and small cap funds. To give you a perspective, in the recent market correction, large-cap funds on an average fell by 5.70%, while the fall was 7% for mid-cap funds and small-cap funds.

You do have exposure to large caps in your portfolio (as of January 2022):

  • ICICI Pru Tech - 72%
  • Mirae Asset Taxsaver – 76%
  • PGIM India Flexi Cap – 57%
  • Edelweiss Balanced Advantage – 62%

ICICI Pru Tech is a sector fund that invests only in infotech stocks. So while it provides your portfolio with a large-cap exposure, it is far from a diversified offering.

Funds that have a fluid investment mandate when it comes to market cap (large, mid or small cap) will shift their exposure depending on where the fund manager sees opportunities. If these funds shift largely towards the mid and small cap segments, it would alter the risk profile of the portfolio.

That is why your portfolio needs a true-blue large-cap fund.

My reservation on the sector fund.

ICICI Pru Tech is an IT sector fund. Such funds are cyclical in nature. They tend to do well when the underlying sector performs. However, when the sector goes through a rough patch, the manager doesn’t have the liberty to invest in other sectors. Hence, it's a high-risk, high-return investment proposition. Sector or thematic funds must only be a small part of the portfolio.

Such funds work best when you have a clear entry and exit strategy and hence one must understand the dynamics of the sector, or have adequate advice available on the sector. If you don’t have access to such resources, it's better to stick to regular diversified equity funds.

If you still want exposure to a sector, limit it to 5% of your equity assets. Currently it is roughly around 15% of your portfolio.

Suggested action points.

If you insist on having an exposure to ICICI Pru Tech, reduce it from Rs 5,000 to Rs 2,500.

Start SIPs of Rs 4,000 in a large-cap fund, Rs 4,500 in a mid-cap fund.

Increase the SIP amount in ICICI Pru Short Term from Rs 5,000 to Rs 6,000, in order to maintain portfolio’s equity and debt allocation.

The asset allocation changes depending on your additional contribution towards a particular fund, as well as due to market movements. So, it would be prudent to keep reviewing the same to ensure that your portfolio does not go off-track.

I would suggest that the additional SIP of Rs 7,000 that you plan to start could be made in large cap and mid cap funds. You also don’t have a dedicated mid cap fund in your portfolio, so there is an opportunity to add that and fill the gap. Here are our analysts’ views on some funds:

Large-Cap Funds:

Mid-Cap Funds: 

My views on your long-term goals.

You need to decide upfront on the target corpus for each goal. You will have to take inflation into account when arriving at this figure. Knowing this will help you decide how much to invest regularly and where. In the absence of that, you will have no way of figuring out whether your investments are on track.

The best way would be to assign a separate portfolio for each goal, since each have a different time span, which will accordingly have an implication on the risk you can take and the investments to look for. For instance, the money required for your child’s education will most likely be needed before your actual retirement. So, the withdrawal too will happen earlier.

Since both your goals are long-term in nature and with age on your side, here are my suggestions, assuming that you are in a position to take higher risks.

Your current portfolio can be assigned to your child’s education goal. From an overall portfolio perspective, equity accounts for roughly around 78-80% of your portfolio and debt accounts for around 20-22%. If you are a high-risk investor, then the asset allocation seems fine. Similarly, large cap accounts for roughly 45-47% of your portfolio, mid-caps are around 10-12% and small-cap exposure is around 18-20%. The ideal allocation could be 45% in large caps, 20% in mid-caps and 15% in small caps; which combined would make it 80% allocation in equities.

For your retirement portfolio:

  • 85% of assets in equity
  • From the equity exposure, the large, mid and small cap exposure can be 45%, 25% and 15%, respectively
  • 15% of assets in debt
  • You can start de-risking the portfolio as you approach closer to your goals by shifting from equities to debt
  • For retirement planning, you can also look at adding the New Pension Scheme, or NPS.

Final note…

If you plan to retire, say at 60 years, you still have 28 years to build your corpus, which with a prudent planning should be achievable. If the task appears too daunting, then it would not be a bad idea to employ the services of an investment advisor. An advisor can help you with your financial planning exercise along with regular monitoring of your portfolio in line with your changing personal circumstances, as well as ensure that your asset allocation is intact.   

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