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Have I approached the right way of investing for achieving my goals

I have recently started investing in mutual funds and I selected the top performing funds for my long term investments. I am moving all my maturing FD's amount to these funds. By the year end I will be investing around 30 lakhs in the selected funds. I am investing these amount for buying home after 5 years, child's education after 15 years and retirement. I am 32 years old and I can stay invested for 10-15 years. I can take high risk. Presently I am investing 50% in mid and small cap, 15% in large cap, 15% in multi cap, 10% in banking and 10% in infrastructure funds. From next year I will doing SIP's for the selected funds. I have 10 funds in my portfolio. Is this the right approach for my goals?

Jun 7, 2017 by Shiva, Hyderabad  |   Mutual Fund

Good financial planning practices suggest that, you should have separate investments for separate goals. Though all your goals are long term in nature, it will be helpful for you (in the long term) to segregate different investments (schemes) for different goals. That way you will be able to monitor the progress against each goal more effectively.

Coming to your current / planned investment portfolio, most financial advisors will opine that it is an aggressive portfolio and suggest a more moderate one. However, we in Advisorkhoj, have a different opinion, as far as long term equity investments are concerned. Risk and return are directly related; higher the risk, higher is the return in the long term,. You can get great returns from your portfolio, provided you understand the risks and are able to stay on top of these risks. Midcap and sector funds are the more aggressive (risky) components of your portfolio. How can you stay on top of these risks? By following the stock market and developments in the economy. For example, sector funds follow a cycle – a period of high returns followed by a period of low returns. Therefore, timing your entry and exit in these funds will give you the best results. Top performing banking and infrastructure sector funds have given 35 to 50% returns over the last one year; if you have invested in these funds in the last one year, then you should be happy with your returns. The high returns given by banking and infrastructure are due to the fact that, these two sectors were beaten down the most in the bear market of 2015 / early 2016. The bull run for banking and infrastructure is, however, far from over. Economic growth in picking up in India and the Government reforms / budget initiatives, along with monetary policy of the RBI, are likely to ensure that, strong run of banking and infrastructure sector continues in the future too. However, at some point of time in the future, interest rates will bottom out and global weakness return. That will be the time to exit banking and infrastructure funds, and shift to diversified (multi-cap) equity funds.

The midcap story is a little more difficult to understand and analyze. Midcaps have been on a fantastic run from 2014 onwards. Contrary to normal expectations, midcaps outperformed large cap even in the bear market of 2015 / early 2016. Midcap stocks are trading a valuation premium to large cap stocks which is an unusual. Experts have been talking about the midcap valuation premium for more than a year now but the situation persists and they are not able to explain why it persists. In Advisorkhoj, we believe that, experts may be wrong but a market trend cannot be wrong; the market is bigger and more knowledgeable than all the experts. Maybe there is a paradigm shift in how investors look at midcap stocks and funds. Therefore, we think that it is fine for you to have a high exposure to midcaps, since you are young and have a long investment horizon. However, you should monitor the valuation of midcaps (P/E ratio of BSE – Midcap or Nifty Midcap 100 indices) versus large cap (Sensex, Nifty, BSE – 100 etc) and see if the valuation gap is widening further or is stable. If the gap is stable, there should be no cause of concern; but if it keeps widening, be alert and be ready to shift to large or multi-cap. Usually, the inflexion point is reached at the peak of the bull market; the peak can be sensed by gauging the mood of the market (and investors). Usually when the mood is euphoric at the bull market peak and a deep correction or bear market is imminent. That is the time, when you shift to more conservative investments like balanced funds and ride out the bear market. This is for lump sum investments. As far as SIPs are concerned, you should continue to invest, irrespective of market cycles. Hope this helps. Please continue to follow us on Advisorkhoj. We will share with you latest developments in the market and our perspectives.

Thanks for writing to Advisorkhoj.

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