I am planning to do a lump sum investment in mutual funds and researching on which mutual funds to select. I have already been doing SIP in MFs from 2018, however, this is the first time I am investing lump sum in MFs and want to make sure I am not missing anything before making the investment and hence, looking for suggestions from this great community.
Goal:
Build long term wealth for major life milestones like children study, marriages, my retirement.
Looking to invest for 10-15 years and get around ~20% XIRR (20% sounds a lot for 10 years but would like to aim for this).
My Investment Theories: Theory#1: Invest in actively managed mid and small cap funds for long term, when close to my goal/exiting funds, switch to large cap funds/hybrid funds. Theory#2: Create a balanced portfolio with index funds (Nifty 50), flexi cap, mid cap and small cap funds in this order if investment amount i.e. index funds gets largest allocation followed by flexi cap, mid cap and small cap.
What do this group think which theory should we take in general for long term investment? Since it is long term (10 years), it feels like I should go with Theory#1 since small cap and mid cap funds should outperform in the longer term but is it that simple? Am I missing something?
Mutual Funds that I have selected so far:
Large Cap or Flexi Cap
Quant Flexi Cap
PPFAS
Mid Cap
Motilal Oswal Midcap Fund
Small Cap
Quant
Tata small cap
One Gold ETF (yet to research about it)
MF Filtering Criteria:
Low expense ratio
Less overlap between my MFs.
Past returns.
Please do share your opinion about both of these theories, would love to hear which one should I go far. Thanks!
Firstly, you need to ask…is the market correction over? has the market stabilized at current levels? Why you want to deploy lump sump?
Investing lump sump means locking your investment at the current NAV.
Thanks Sameer for taking a look at my post, I am not too worried about the market correction since my investment has a long horizon, don’t want to time the market.
Apart from geopolitical issues, Q2 result of India Inc. has been not great either. If you think the markets are in bull market condition or attractively priced at current levels, then lump sump investment is entirely your call.
I would be cautious for lump sum in the current state, bcz markets are still volatile and might miss out the benefit of cost averaging (no matter short or long term). Anyways, the call is yours.
To achieve 20% XIRR, your best bet would be Theory 1.
You would have to do a combination of SIP plus Lumpsum investments for the same.
One Lumpsum investment strategy would be to track the PE of the index that you want to invest in, identify a PE level that you are comfortable with, and do a Lumpsum investment everytime the index hits that PE.
Just curious about your fund category selection. Can you talk more about your thought process for that?(2 flexicap, 1 midcap and 2 smallcap)
Over a long term. I do not see any big difference in the expected returns between large vs mid/small cap funds.
They should even out in the long run. Especially when you do a lump sum in this present market condition.
If there is a further fall which can be expected then lump sum is definitely a good choice.
Coming to choice of mutual funds
Buy a multicap or flexicap
Buy a mid/ small cap
Buy a contra fund
Thanks @sameernics for sharing the inputs, I would certainly caution myself of investing everything at one go. I’ll try to invest in 3 tranches and would fully invest until Q1 2025.
The reason for lump sum investment is that I have some money right now with me which I want to invest otherwise I may not be able to pay attention to it and it would sit idle in a savings account with a 4-6% interest rate.
@StonePitbull My current SIP follows more of Theory#1 and was heavily tilted towards largecap/ index funds. I have followed a more balanced approach there since I did not had too much info when I started but I have been doing a lot of rebalancing over the years now and it is a balanced approach with 50% index/large cap and 40% small cap/thematic funds. My current portfolio has an XIRR of ~20% over 6 years.
@Dram This is a really interesting point and is in contrast to my belief, is there any data to prove this? I was looking at few of large cap/index funds past returns and small cap funds were outperforming them over 10 years. Although my comparison is for a handful of funds, so not sure if I could consider that as a trend.
@nevds.365 Thanks for asking the question, I should have mentioned that in my post itself. These are actually the funds I have filtered as of now, I still need to filter them, plan to invest in just one MF per category (excluding small cap, may invest in 2 of them).
Filtering Criteria:
Wanted to invest in a flexi cap fund instead of large cap/index fund since flexi cap gives you exposure to midcaps as well along with large cap, potential for a higher return over longer duration. PPFAS is a value play here and Quant Flexi Cap has a comparable PE to PPFAS and gives me momentum play as well.
Motilal Oswal was selected purely based on returns, the second best midcap fund was lagging way behind that MO midcap fund based on returns. Although, the churn rate of this fund is very high along with it’s PE (~55) which worries me.
Wanted exposure to small cap funds to increase the overall return for my portfolio, Quant and Tata small cap have shown good return and have relatively low AUM as of now along with less than 30 PE.
Want to have GOLD in my PF for more stable returns during bear phase of equities.
Big expectation, even with active/passive funds or mid/small cap funds. We may have to take regular and appropriate actions. As it is hard to predict where our market will be next year, we cannot just keep on investing, expecting a linear return. The current bull run may very well continue but if it does not for any global reason or lack of liquidity from SIPs, we may see no movement for a couple of years. With goal-based investing, time also plays an important role.
Of course, for people who have direct equity experience, managing MF investing will be easy.
@ChaitanyaC Could you elaborate on this a bit for my understanding? If you’re talking about regularly rebalancing the portfolio, is there a good strategy for this?
Your post entirely resembles my current situation. I have some fund and want to invest lump sum else the fund would be in an FD at 6-7%.
I researched and arrived at a conclusion to invest equal amounts in -
1- Smallcap
2- Midcap
3- Flexicap
Avoiding Largecap because others would grow fast and I am looking at a long term horizon. Though I may start SWP in a couple of years at around 8-9% (started own business after many years of job and need a regular cash flow) and let the fund compound at 12-14% for future goals like Child Marriage & Retirement.
I am investing regularly in Sukanya Samriddhi Yojana for Child’s education. Will keep adding physical gold.
I saw interviews as well of most of the fund managers and liked the following -
Smallcap - Quant - Data & Analytics driven + passionate
Midcap - Motilal Oswal - Dynamic + experience of losing money and then doubling it
Flexicap - PPFAS - Strong fundamentals & core values
Let me know what do you think about them which makes you shortlist them.
Great to see the crisp reasoning along with all the funds you have selected. Here are my 2 cents:
In small caps, although I like Quant fund investment philosophy, I am being cautious in investing my money there due to recent news that have hit them (front running charges, Adani issues, etc). haven’t closed the curtains on it though, but I would want to dig a bit more before investing there. I do like Tata small cap in this space along with Quant, Tata has a relatively low AUM and I trust the AMC as well.
I did a lot of research on Motilal Oswal (MO) mid cap fund after writing this post and although it seems like MO says they do not do momentum investment, I do feel they are actually performing it looking at there stocks, there PE is 59 which also supports my theory. The downside of this is in bearish phase, it would take the hardest fall, still trying to figure out if I have the stomach to look at those down sides in my portfolio.
PPFAS is the best of the lot, however, the AUM is touching ~90K crore now and I feel it may not be able to achieve it’s past returns. If you’re okay with lower returns than go for it.
Personally, I have maximum confidence in PPFAS. I have listened to a lot of the talks by Rajeev Thakkar & Raunak Onkar, personally interacted with them and find them to be extremely thoughtful, well read and most importantly, steadfast practitioners of value investing. They are very true to their investment philosophy and follow it to a T. I like their thought process, transparency about their investment philosophy and walking the talk.
The advantage investing with such a fund in the current market is that one need not worry too much about the state of the market (since they abhor momentum) and also the size of their NAV since they have been following the principles of Mr Parag Parikh, even when they were a tiny fund. They find value and have the foresight and conviction to buy and hold stocks like Alphabet, ITC, Coal India, etc irrespective of whether the market is currently favouring the stock or not.
Discl: Its the biggest in my MF portfolio, for the very same reasons.
Thanks for sharing a lot of insights about PPFAS @BuyRightSitTight , what are your thoughts about there bloated AUM? Pretty sure by now, it is India’s most preferred MF by now.
No, I am not explicitly talking about regular rebalancing. Regular rebalancing is essential for pure goal-based investing. Calculate what number will be needed, move towards that number with time, if market performs. No thoughts beyond this. Invested for a goal, met the goal.
But if, despite started for goals, and if such goals can also be met with funds from other sources, to whatever extent, one can take a chance of not disturbing what is being built, and take action only when necessary. Observe, wait and wait kind of situation.
Their AUM is still very small compared to the AUMs of other fund houses. Other fund houses launch funds left right and center in the pursuit of AUMs, but not PPFAS. They are very thoughtful about the same as can be seen in the handful of funds they have.
They have always stuck to their principles since when they were a tiny fund, to now and I would bet, going forward too.
In my mind, sticking to their principles and abhorring momentum chasing means large AUM won’t be a hindrance.
It seems like this is an old video since I heard AUM close to ~17000 crore somewhere in the video (apologies if I misheard), as of now the AUM is close to ~90K crore which is way too much for any single fund to handle. The core problem with high AUM is selecting concentrated bets on small caps which they were doing earlier, management themselves have acknowledged it in one of the videos I saw recently (will try to attach it here if I find it again). Having said that, only time will tell how they handly high AUM, hoping they do it in a way without impacting returns.
I fully agree with PPFAS following principles though, what I am particularly impressed of is there skin in the game, it’s mentioned in their website as well which is great to see.
Please visit website www.indiapassivefunds.com
Here you will get ETF for all the Benchmark Indices which every active mutual fund scheme needs to beat.
If you believe that beating the benchmark is nearly impossible for 80%-90% of fund managers, you can put your money there in lump sum mode and trade ETF like stocks too.
