All-equity investment too aggressive for investment horizon of 3-5 years

Investment

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I have monthly systematic investment plans (SIPs) of up to36,000 for the last two years— 8,000 in DSP Tax Saver, 7,000 in Franklin India Tax Shield, 5,000 in ICICI Prudential Long Term Equity, 5,500 in ICICI Prudential Value Discovery, 2,000 in Franklin India Focused Equity, 2,000 in Franklin India Equity, 1,500 in Franklin Smaller Companies, 3,000 in Kotak Standard Multi-cap, and 1,000 each in HDFC Hybrid Equity and Reliance Small Cap. We have a moderate risk appetite with a time horizon of 3-5 years. Will this allocation give us good returns?

—Naman Gupta

You are investing in an all-equity portfolio (save one fund that has some debt allocation in it) for a 3-5 year time frame. Such a portfolio is way too aggressive for this time frame and there is a chance you could lose money.

First, tax-saving funds should be used for tax deduction; at the end of the lock-in period (of three years), you can keep it or move the corpus to open-ended funds. They are all broadly diversified funds and avoid mixing purposes (tax-saving and long-term wealth generation) as it could skew your asset allocation.

Second, while the funds you have chosen are good with decent track records, many of them belong to the aggressive categories of diversified funds or small or mid-cap funds. Like I said, this is risky for a short time frame such as yours.

My recommendation would be to first separate your tax-saving investments. You are investing 20,000 a month in such funds and can continue holding them. The remaining 16,000 should ideally be invested in a more moderate portfolio with not more than 60% in equity. ICICI Prudential Value Discovery, Franklin India Equity, Kotak Standard Multi-cap and Franklin India Smaller Companies are good for the equity portion. The remaining 40% can go in short-term bond or liquid funds from Axis and HDFC mutual funds.

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Written by Loknath Das