personal finance

How much should I invest in ELSS, large-, mid-, small-cap mutual funds?

I am 25 years old. I earn around Rs 50,000 per month. Firstly, how much should I invest in large cap or small and mid cap funds as well as tax saving mutual funds? I know that the tax saving limit under Section 80C is Rs 1.5 lakh.

Ironically, when I had a salary of Rs 21,000, I used to invest around Rs 6,000 in tax saving mutual funds through the SIP mode. My salary has more than doubled, but the investment has been reduced to 1/3rd, that is, hardly Rs 2,000 a month. But now I again plan to invest at least Rs 10,000 per month in tax saving mutual funds.

I would like to have a good portfolio. So far, I have invested Rs 3.76 lakh in various mutual funds, mostly ELSS and small cap funds, including Rs 60,000 in Reliance Small Cap Fund which is going well and Rs 75,000 in L&T Emerging Businesses Small Cap Direct Fund which earlier was performing well but now is greatly underperforming. Should I redeem it and reinvest?

Also, I had put Rs 20,000 in IDFC Infrastructure Direct Plan and Rs 10,000 in DSP Natural Resources and New Energy Fund Direct Plan. Both these funds have given negative returns. Should I redeem them and reinvest? If yes, then into which category?

Should I start new SIPs for ELSS or invest lumpsum as I am about to get my yearly bonus. Also, please suggest any other good funds to invest in and the respective amounts to be invested through SIP or lumpsum.
–Atulay Mahajan

We strongly recommend goal-based investments. We always maintain that investors should choose mutual funds based on their goals, investment horizon, and risk profile. This approach will help investors to have a sharply focused mutual fund portfolio that will help them to achieve their various financial goals.

We would ask you to adopt the same approach. Currently, you are investing without any goals. Also, it is doubtful whether you have chosen the schemes, especially small cap schemes and sector schemes, after checking whether they meet your risk profile and investment objective.

First, check your risk profile. Do not go by your perception. Take an online quiz to assess your risk appetite. Next, check whether your mutual funds are in line with your risk appetite. For example, small cap schemes are meant for investors with a very high risk appetite and stomach for volatility. You should also invest in small cap schemes only if you have a longer investment horizon. Do you fit the bill? If yes, then continue with the small cap schemes.

We do not recommend sectoral schemes to regular investors. Sectors go through ups and downs based on the economic cycle. It may not be possible for regular investors to time their entry and exit based on the prospects of the sector. We believe they would be better off in multi cap schemes with a diversified portfolio – these schemes would have meaningful exposure to sectors with huge potential.

You should consult a financial planner or mutual fund advisor. Also, try to save and invest at least 30 per cent of your salary if you can. Remember, you would be able to create huge wealth by investing a small sum regularly over a long period.


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