Ask Morningstar: Some good funds to add to a portfolio

By Kavitha Krishnan |  20-01-23 | 
 

My mutual fund SIP portfolio: Mirae Asset Tax Saver (Rs 3,000), Quant Tax Plan (Rs 3,000), PGIM India Midcap Growth Opportunities (Rs 2,000), Axis Corporate Debt (Rs 2,000). That amounts to Rs 10,000. I want to double it to Rs 20,000. Should I add more funds? I am looking at 80% in equity and 20% in debt funds. My time frame is 15 years.

I would like to congratulate you on making the effort to build your portfolio thoughtfully, based on your considerations and risk appetite. Your disciplined investment approach will pay off in the long run.

Let’s evaluate your current portfolio.

Mirae Asset Tax Saver

This is a large cap-oriented strategy that seeks to invest in high growth stocks at reasonable valuations. The fund is managed by Neelesh Surana who we think is amongst the best managers in this space. He adapts a consistent approach of investing in market leaders with a view to diversity the portfolio across sectors and stocks.

Quant Tax Plan

This fund uses a process that is based on internal metrics and predictive analysis. The manager runs screeners to identify stocks that are likely to give investors an upside. The fund has grown significantly in terms of its size, with the number of holdings also increasing significantly over the past two years considering that they have been performing well. Although the fund is currently being run with a large-cap bias, it’s important to keep in mind that the fund’s construct and process can lead this to change quickly. For example, the fund was being run with significant exposure towards small and midcap stocks in 2021.

While both these funds are Equity Linked Savings Schemes (ELSS), the two share a very low overlap and a significant difference in the manner in which the funds are constructed.

PGIM India Midcap Opportunities

The fund invests largely in the mid-cap segment and shares a very low overlap with the other funds. This fund is managed with a focus towards investing in companies that are backed by strong financials and their sector dominance.

Axis Corporate Debt

The fund largely invests in high quality corporate bond papers.

What you can add to your portfolio.

Consider adding a small-cap fund. However, you are already taking on a higher level of risk by investing in the Quant Tax fund, so ensure that you keep your portfolio risk levels in check. Add a large-cap and a large- and mid-cap fund. This will give it the much-needed pureplay exposure towards large caps.

Adding a flexicap fund will give your portfolio the much needed flexibility and add a cushion of being able to navigate across market caps whenever there is the need to do so.

Ideally your portfolio should carry a major allocation towards large caps. In this case, your exposure towards the large and mid-cap fund and Mirae Asset TaxSaver will act as a cushion, considering their significant large cap exposure. The additional risk that you are likely taking on by investing in a strategy that’s based on predictive analysis is being mitigated by a combination of your large and flexicap exposure and by investing in small and mid-cap funds that carry a lower level of liquidity risk.

You could also consider investing in a fund that takes some exposure to international equity. It could act as a good starting point in case you want to look at diversifying your portfolio globally too.

You can consider these (below mentioned) funds based on your risk and return appetite. Do take into consideration your investment horizon when you consider investing in these funds.

  • Small Cap: Kotak Small Cap is managed by Pankaj Tibrewal and is focused on ensuring that liquidity risks on the fund remain minimal.

Within the debt segment, you could look at investing in a medium-term fund that will hold up your portfolio in the current market conditions. Considering that there are expectations around a slowdown in the rate hike cycle, we think that this could be the right time to incorporate a medium-term strategy into your portfolio.

Allocation

So for the additional Rs 10,000, this would be the suggested SIP breakup:

  • Large Cap: Rs 3,000
  • Large and Mid Cap: Rs 1,000
  • Flexicap: Rs 2,000
  • Small Cap: Rs 2,000
  • Medium Term (Debt): Rs 2,000

Considering the above, your overall allocation for Rs 20,000 will be as below:

  • ELSS: Rs 6,000
  • Large Cap: Rs 3,000
  • Large and Mid Cap: Rs 1,000
  • Flexicap: Rs 2,000
  • Mid Cap: Rs 2,000
  • Small Cap: Rs 2,000
  • Medium Term (Debt): Rs 2,000
  • Corporate Bond (Debt): Rs 2,000

Some additional relevant reading:

What makes Quant Mutual Fund such a hit?

Why has Axis Bluechip dissappointed?

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

6 smaller fare funds to consider

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Articles authored by senior research analyst Kavitha Krishnan

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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