Your Fund Portfolio

Charan

First off, kudos on starting your mutual fund investment journey at a young age. Keep investing through the systematic investment plan (SIP) route, increase the sums as the years go by, review your funds at regular intervals (say once every year) and take corrective steps, if need be. This should hold you in good stead and help you achieve your goal of wealth creation in the long run.

Now, coming to your investments, you have chosen the direct plan in all the four schemes. For a seasoned investor who understands the how, why and where of mutual fund investing, that’s a good choice — direct plans give better returns than regular plans. That’s because in direct plans, you invest on your own without routing the money through a distributor. This saves on the commission that the fund house (and indirectly the investor) pays the distributor. The returns in direct plans of equity schemes can be higher by up to 1 per cent or more annually, compared with regular plans. We assume that you have the wherewithal to research and select funds, and review their performance on your own.

Next, you have chosen the growth option in one scheme, the dividend re-investment option in another, and have not indicated your choice in the remaining two schemes. Here, some course correction is needed. When you invest in mutual funds, the growth option scores over the dividend option. That’s because growth plans enable compounding of returns and are also more tax-efficient than dividend plans. In growth plans, the gains made are re-invested into the scheme and so the investment can potentially compound automatically. In dividend plans, the gains made may be paid to you as dividends and so compounding does not happen automatically. Also, every time a mutual fund scheme declares dividends, it has to pay dividend distribution tax — about 11.65 per cent on equity funds and 29.12 per cent in the case of non-equity funds.

If equity mutual fund units are sold after being held for more than 12 months, the gains are categorised as long-term and such gains in excess of ₹1 lakh a year are taxed at 10.4 per cent. Given that you are investing for wealth creation, it’s better to go for the growth plan, hold your investments for the long term and then redeem the units when you really need to.

Dividend reinvestment plans, in particular, are a poor choice since they suffer tax twice — first, at the time of dividend payment and then again on the gains when the units are redeemed. Note that when you shift from dividend plans to growth plans, or vice versa, it is considered redemption and tax on gains may be applicable. Even so, it may be worthwhile to shift from the dividend plan to the growth plan, given that you have a long-term horizon.

The time horizons for your investments are long — that’s a good thing. Investing in equity mutual funds must ideally be for the long term and aligned with your goals. Equity schemes can be volatile in the short term, but have the potential to pay off well in the long run. In this context, consider increasing the time horizon of the small-cap fund (seven years), if need be. Next, the amount that you are now investing monthly — ₹14,000 in total — is a good start. At an assumed annual return of 12 per cent, this can grow to ₹4-5 crore in 30 years, which can fund your retirement. But you must gradually increase the amount, when your income permits.

Finally, coming to your specific fund choices, the portfolio is a good blend across categories and styles — large- and mid-cap active (Mirae Asset Emerging Bluechip), small-cap active (SBI Small Cap), large-cap passive (UTI Nifty Index) and mid-cap passive (ICICI Prudential Nifty Next 50 Index). All the four schemes are fine with a good track record. Going forward, you could consider adding a quality multi-cap fund, too, to your portfolio.

Send your queries to mf@thehindu.co.in

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