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For investors, passive funds are cheaper and easier to maintain

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I am a 33-year-old working professional and plan to accumulate 7 crore over the next 20 years.

Every month, I plan to invest 60,000 in the following funds…

* BNP Paribas Substantial Equity Hybrid Fund ( 10,000)

* Axis Small Cap Fund ( 12,500)

* Axis Midcap Fund ( 10,000)

* Parag Parikh Flexi Cap Fund ( 15,000)

* Mirae Asset Tax Saver Fund ( 7,500)

* Axis Blue Chip Fund ( 5,000)

I plan to increase my investments by at least 15% every year. Please check if the fund selection is fine and has the required diversification for a long-term portfolio.

I have been investing in mutual funds for quite some time based on the top-rated funds’ list available on various websites. It has given me good returns in the past. I have created the above plan based on the same method. Please suggest corrections, if any, since the top-rated funds may not be the best for every portfolio.

—Ayush

Without a step-up investing strategy and assuming a nominal 10% portfolio returns over 20 years, you would need to invest more than 80,000 each month to reach your goal. But thanks to your step-up strategy (of 15% per year), you can start off with 60,000 and comfortably cross your target.

In fact, if the stars align and the market performs to give you the 10% annualized return, you will likely end up with a corpus closer to 9 crore than 7 crore.

So, you have some margin of error in your planning, which can be quite useful.

Regarding your portfolio design, it is no surprise that you have an equity heavy portfolio. The funds that you have chosen are well-rated ones.

However, I would suggest two changes. One, for such a multi-fund portfolio, you can avoid hybrid funds and go with a direct allocation to debt, if you like.

Second, for large-cap funds, you can go with passive options such as investing in a Nifty 100 fund. This will help you save on expenses and will be easier to maintain.

In fact, given your low large-cap allocation, you can combine your hybrid and large-cap allocations into a single Nifty 100 allocation.

Over the coming years, as you increase your SIP (systematic investment plan) amount, you can also consider adding an international fund (again, an index fund such as S&P 500 index fund) to your portfolio.

Srikanth Meenakshi is founder of Prime Investor.

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