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Mutual Fund Queries answered by Tarun Birani, Founder and CEO, TBNG Capital Advisors

The average return of small cap mutual fund category is higher than other categories, but it comes with the extra risk associated with it.

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Last Updated: Dec 24, 2019, 05.35 PM IST
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I am 42 years old. On the advice of my mutual fund broker, I invested a lumpsum in two small cap funds, Nippon India Small Cap Fund and HDFC Small Cap Fund, in January 2018. These are my only investments in mutual funds. I am making a loss on both these mutual funds. Should I continue to hold on to these small cap funds or should I redeem them?

The least investment horizon should be seven years in small cap funds, based on a rolling-return study done on the small cap mutual fund category. Also, the average return of this category is higher than other categories, but it comes with the extra risk associated with it. Since you invested in these schemes, mid- and small-cap categories have corrected due to the NBFC crisis as well as GDP growth falling continuously. During an economic slowdown, the mid- and small-cap categories get hit the most. Also, based on historical observation, every big correction like this is followed by outperformance in coming years. So, if you have a long-term investment horizon of five years plus, you can continue to stay invested in these funds. Both the funds are the best in their category, but they are suffering because the category has been hit hard.

I have Mirae Asset Large Cap Fund, Motilal Oswal Midcap 30 Fund, and Invesco India Growth Opportunities Fund in my portfolio. I am thinking of adding an international fund to my portfolio now. Is there a need to diversify overseas for me? Which fund should I add?
--Samuel Menezes

There are many inputs required to make a new investment based on time horizon, risk tolerance ability, financial goals, age, and many other factors to decide suitable investment options. Since the above information is not available, it is difficult for me to suggest an appropriate investment option. In the case of overseas investment, one can look at various factors like fund required overseas for goals like children education or investment purpose. There is an interesting category of funds like Parag Parikh Long Term Equity Fund and Axis Growth Opportunities Fund which invests a maximum 35% of their investments in overseas companies like Microsoft, Apple, etc and balance in Indian companies. There is also another category that invests 100% funds in overseas companies like
Franklin India Feeder Franklin US Opportunities Fund or ICICI Prudential Global Stable Equity Fund (FOF) etc. Going outside India's investment is a good strategy in order to bring diversification as well as benefit from other economies' growth sectors.

I am a 53-year-old working in an MNC at a senior position. My distributor is telling me I can make higher post-tax returns from debt mutual funds than fixed deposits. Which are these debt funds? Should I invest in them?
-- Sachin Sharma

There are many factors to review apart from taxation while comparing fixed deposits with debt funds. For example, factors such as returns, risk, liquidity, flexibility, and so on. If you are holding debt funds for the short-term (less than three years), there is no real difference between bank FDs and debt funds. Both are taxed at your peak rate of taxation. Bank FDs qualify for the basic exemption and that will work in favor of bank FDs. However, if you are holding the debt fund for over three years, you pay a concessional rate of 20% tax on the LTCG and also get the benefit of cost indexation which will get better tax-adjusted returns than fixed deposits. The investor needs to be aware that unlike FDs, there are no guaranteed returns in debt funds.. However, since underlying investments in these schemes are in debt securities, they have low to medium risk. Also, one needs to be careful to select the category of debt funds like credit risk and medium-term funds have high-risk credit investments whereas categories like corporate bond & Banking & PSU have AAA-rated papers in their portfolio with low risk.
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