I want to invest Rs 20,000 in mutual funds via SIP. Should I invest Rs 4K each in large-, mid-, small-, flexi-caps and balanced funds?

I want to invest Rs 20,000 through systematic investment plans (SIPs) in mutual funds. A friend advised me to start an SIP of Rs 4,000 in five different MF schemes: large-cap, mid-cap, small-cap, flexi-cap, and balanced fund. Is it the right way to diversify investment? I have two goals: retirement after 25 years and buying a car after five years. I am 28-years-old. 

—Naina 

Reply by Nitin Rao, Head Products and Proposition of Epsilon Money Mart Pvt Ltd 

It’s a very good move that you’re already considering retirement planning. Though I don’t know about your risk appetite, judging by your question, I get the feeling that you will be investing for the first time. Therefore, I suggest you know your risk appetite before plunging into any of the funds mentioned above. When it comes to equity, the risk remains elevated when investing for a short period of time. Therefore, I suggest dividing your money into two parts; one for your retirement planning and another for your car.  

Assuming you will need around Rs 10 lakh to buy the car, the required sum will come somewhere near Rs 14 lakh after five years. Therefore, allocating more sums to it currently will make more sense. You can divide the sum: Rs 15,000 for a car and Rs 10,000 for retirement.  

For the car, since the time horizon is less, we suggest you invest in hybrid funds. They should take care of your needs. Again, I would reiterate that you must know investing in equity for the short term can be highly volatile. While investing for five years can be on the edge of investing in equities. You may not be able to make big returns on your investments. So, you must also keep aside some funds for a down payment when buying your car after five years.

For retirement, having a proper mix of funds makes sense. We suggest you start with a large-cap index fund and add a growth-oriented flexi-cap fund to your portfolio.  

While your friend wasn’t entirely wrong, having less is more. Since you are only starting currently, having a lot of clutter will only confuse you. Once you are used to various business cycles and can devote more money and time to the markets, diversifying to mid- and small-cap funds will make sense, as they carry very high risk. 

Besides, I will also suggest you plan some more goals in your life and invest towards them. For instance, you can plan for overseas vacations, wedding planning (if you aren’t married), house purchases, etc. However, you must plan to do SIPs only if you have a surplus amount. 

(Views expressed by the investment expert are his/her own.)

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