Targeting 14% CAGR with mutual funds? Here’s how to fix your portfolio & boost outcomes

Synopsis

A 33-year-old investor's ambitious 14% CAGR target with mutual funds was deemed unrealistic by a financial planner. The expert advised aligning expectations with historical equity returns of 11-13% and suggested consolidating the portfolio for better impact and avoiding over-diversification.

Many investors in their early 30s aim to build a diversified portfolio across asset classes and geographies with an eye on long-term wealth creation. While setting an ambitious return target is common, aligning expectations with market realities, maintaining the right asset allocation, and investing consistently are far more critical to achieving financial goals.

A 33-year-old investor with a 20-year investment horizon and a moderately aggressive risk profile has a goal to build a diversified portfolio across various asset classes and geographies, targeting a CAGR of 14%, reached out to ETMutualFunds for an analysis of his portfolio.

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He has investments in Motilal Oswal Midcap Fund, Parag Parikh Flexi Cap Fund, ICICI Prudential NASDAQ 100 Index Fund, Motilal Oswal Gold and Silver Passive FoF, Motilal Oswal Nifty 500 Index Fund, Axis Greater China Equity FoF, Axis Small Cap Fund, and HDFC Balanced Advantage Fund.

Rajesh Minocha, a Certified Financial Planner (CFP) and Founder of Financial Radiance, analysed the portfolio and told ETMutualFunds that such expectations could be unrealistic. Historically, long-term equity returns tend to fall in the range of 11% to 13%, depending on market cycles and investment discipline. To generate higher returns, investors need to stay invested across economic cycles and avoid reacting to short-term volatility.

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“At the outset, the investor expects a 14% return, which could be unrealistic. Based on investment discipline and market stability, long-term returns are likely to range between 11% and 13%. To achieve higher returns, investors should remain invested through economic cycles and avoid panic selling,” Minocha said.

Beyond return expectations, the bigger challenge lies in aligning investments with long-term income goals. Assuming the investor aims to generate an inflation-adjusted monthly income of Rs 50,000 for 35 years after the accumulation phase, the current SIP of Rs 15,500 may fall short.

Minocha suggests that achieving such a goal would require a monthly SIP of around Rs 36,000, along with an annual step-up of 10% to keep pace with inflation and rising financial needs.

Portfolio observation

A key issue identified in the portfolio is over-diversification. Managing 8 to 9 mutual fund schemes with a relatively small monthly investment leads to inefficiency and diluted impact. Minocha recommends consolidating the portfolio into 5 to 6 well-chosen funds, which allows for better monitoring and more meaningful allocation to each scheme. Small allocations, such as Rs 500 per fund, may not significantly contribute to overall returns even if individual funds perform well.

“Allocating only Rs 500 to each fund limits the portfolio’s overall performance, even if individual funds perform well. Larger allocations are necessary to make a meaningful impact on total returns,” Minocha said.

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Another important gap is the absence of an emergency fund. Investors are advised to maintain a buffer covering at least six months of essential expenses. This ensures that they do not need to withdraw from long-term investments during unexpected situations, thereby protecting the compounding process.

From an allocation perspective, Minocha suggests focusing on core diversified categories such as flexi-cap, large & mid-cap, and multi-cap funds. These categories allow professional fund managers to dynamically allocate across market capitalisations and sectors, reducing the need for constant monitoring by investors.

For stability and diversification, hybrid strategies like balanced advantage funds can be considered, as they combine equity and fixed income. Similarly, multi-asset funds offer exposure to different asset classes and can be a more efficient way to gain commodity exposure compared to investing directly in gold or silver funds.

The portfolio can also be optimised by removing overlaps and redundant schemes. For instance, if a flexi-cap fund like Parag Parikh Flexicap is already part of the portfolio, an additional broad market index fund such as a Nifty 500 index fund may not be necessary. Similarly, instead of allocating small amounts to a gold and silver fund of funds, a multi-asset fund can provide better diversification. In the international segment, rather than concentrating on a single geography like China, a globally diversified fund may offer more balanced exposure.

“Motilal Oswal Nifty 500 index is not needed, if Parag Parikh flexi cap is being done, which is a good fund. Instead of Motilal Oswal Gold & Silver FoF where anyways a very small amount is being done, considerable amounts can be done in a fund like WhiteOak Multi Asset. Instead of Axis Greater China, a globally diversified international fund can be chosen,” Minocha said.

Finally, while some investors prefer managing their portfolios independently, experts highlight the importance of professional guidance. Financial advisors can help with portfolio construction, ongoing monitoring, and aligning investments with evolving goals and risk appetite.

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In conclusion, achieving long-term financial goals is less about chasing high returns and more about disciplined investing, proper allocation, and regular portfolio review. A simplified, well-structured portfolio with adequate contributions and a long-term perspective can significantly improve the chances of success.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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