Ask Morningstar: Looking for small-cap options

Feb 03, 2023

I am 36 years old. My salary in hand is Rs 2 lakh per month with an annual bonus of Rs 3 lakh. My expenses amount to Rs 85,000 per month, out of which my spouse contributes Rs 30,000 per month.

Goals: Save for retirement and buy a house in three years.

I have health insurance and term insurance. No debt. I also have an Emergency Fund of Rs 16 lakh which is in a bank fixed deposit.

  • Stock portfolio: Rs 1 crore
  • Debt fund: Rs 2 lakh in Banking & PSU Debt fund
  • Cash: Rs 30 lakh (savings account)
  • Gold: Rs 50 lakh (family heirloom given by mother)
  • Fixed Income: Rs 52 lakh (PPF and EPF)
  • Equity funds: Rs 23 lakh: PPFAS Mutual Fund (Rs 10,000), UTI Index Fund (Rs 7,000).

How about adding a small- and mid-cap fund from DSP or Mirae Asset? Even international exposure?

You are on a really solid footing. Here are our observations.

  • Cash

I don’t know if you have made a mistake in the savings account figure. I am guessing you did, and it is actually Rs 30,000, and not Rs 30 lakh. Because I can see no conceivable reason why someone who has an Emergency Fund and medical insurance, and term insurance would need to have such a huge amount in the savings account.

  • Gold

When it comes to the gold you own, I do not view it as an investment as it is clearly a family heirloom that has a lot of sentimental and emotional value. In fact, it is something you probably want to pass on to generations.

  • Buying a home

We have no idea whether you want to take a loan or reduce your equity holdings to make a purchase. Or, in which city or town you are looking at, and what the cost it. But if you are taking a loan, then you will have to budget for the equated monthly instalment (EMI) and the down-payment.

  • Investment Amount

You say that your monthly expenses are Rs 85,000 and your spouse contributes Rs 30,000. So from your income of Rs 2 lakh, if we deduct Rs 55,000, you are left with Rs 1,45,000. Yes, you will have to keep a buffer for your EMI and for insurance premiums and other expenses. But you can sufficiently raise your systematic investing into funds. Right now, it is at Rs 17,000; very modest compared to your earnings. We suggest that you up your game. Also open a fixed deposit for the down-payment of your home loan, as you plan to buy a house in a few years.

  • Fund Portfolio

You have already invested in Parag Parekh Flexi Cap Fund, which has 15-20% of its assets in overseas equities. If you want to increase your exposure to foreign markets, mutual funds by far are the most convenient way to go about it. Make a lumpsum investment or opt for a systematic investment plan, or SIP.

Plenty of parameters to consider. Geographical exposure (eg: European). Country specific (eg: China, Brazil, U.S.). There are some truly global that look for investments spread across the globe. Thematic (eg: Emerging Markets, Agriculture, Mining). Active ETFs. If active, a feeder fund or a domestic fund that invests directly abroad?

Some mutual funds invest directly in U.S. stocks, such as ICICI Prudential US Bluechip Equity. Others like Invesco Pan European Equity and PGIM India Euro Equity are focused on Europe but feed into a global fund. ABSL International Equity invests directly in stocks across the globe. ABSL Global Real EstateDSP World Energy are examples of thematic options. There are passive options too – Motilal Oswal Nasdaq 100 and Motilal Oswal S&P 500.

For small- and mid-cap exposure, you can consider funds from DSP, Mirae Asset, SBI Mutual Fund and Kotak Mutual Fund. The mid and small-cap strategies from these fund houses are well managed ones and have a noteworthy long term track record. All these strategies are managed by seasoned managers, and they have a backing of strong team and robust investment processes. Do read 6 smaller fare funds to consider.

You have not mentioned the name of the index fund. Even if it is a one that tracks a large-cap index, it would still be wise to add an actively managed large-cap fund to your portfolio. Over the long-term, an actively managed fund still has the potential to outperform the index. Do read 7 large-cap funds across the rating spectrum.

Read our various fund analyst reports

Articles authored by Himanshu Srivastava


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