The Mutual Fund Show: Passive, ELSS Or Mid And Small Cap Schemes — What's Right For You?

Investors often face a dilemma on whether to invest in passive or active mutual fund schemes.

Exposure to large-cap companies through passive funds makes sense, said Deepali Sen, founder and chief executive officer at Srujan Financial Services LLP.

The ETF (exchange-traded fund) segment in passive funds has reached the size of Rs 6.5 lakh crore, she said. "Current share in overall MF AUM (assets under management) is around 18%, as of December 2023 data," Sen said on The Mutual Fund Show.

According to Nikhil Kothari, director of Etica Wealth Pvt., investors should expand their portfolio. If investors solely invest in passive funds, it could underperform the index, he said.

However, he also highlighted the importance of passive funds vis-a-vis active funds. "The investor can prefer passive funds due to lower expense ratio," Kothari said. "Both funds are important in a portfolio."

The core part of a large-cap portfolio should be index funds and one or two active funds, Kothari said. The choice of active funds will be based on the fund manager and team, he said.

An index fund with low-capping error and low cash component is what investors should opt for, Sen advised.

ELSS funds are suitable for long-term investments, according to Kothari.

"Invest in stocks with high potential growth over long-term and (it) brings discipline to an investor," he said.

The fund's only benefit is tax-saving. "Don't invest unless for tax-saving purposes," Kothari said.

"While I generally advocate for maintaining liquidity in investments, I believe it's important to encourage investors to consider the long-term holding capacity, especially when it comes to ELSS," said Sen.

Most funds adopt the flexi-cap approach to investing, she said. "Some funds also invest in mid and small cap segments."

According to Sen, investors must consider the following aspects in mid- and small-cap funds:

• Client's risk appetite.

• Holding period of 7+ years.

• Expect 30-35% of exposure.

• See a churn of around 20%.

Query 1: I have Rs 2 lakh in savings and would like to start investing in mutual funds. Can you recommend some funds?

Name: Muhammad I Age: 22 years

Nikhil Kothari: He can initially start with two funds—a multi-cap fund and a flexi-cap fund. And start STPs over the next 10 months. Additionally, he should keep increasing his SIP.

Query 2: I currently have SIPs in six funds and would like to retire by the time I am 51. Additionally, I can invest Rs 3,000 in a new fund. Which funds would you recommend?

Name: Rushabh I Age: 31 years

Deepali Sen: With six funds in his portfolio, I believe he has a sufficient variety. However, given his high exposure to small caps, he may want to consider shifting to a fund like SBI Large and Midcap Fund or increasing his allocation to his existing Parag Parikh Flexi Cap Fund.