MFs’ dividend reinvestment, payout options can hit returns

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I am 23 years old and my maximum monthly expenditure is around 8,000. I have zero debt or liability and I save nearly 80% of my earnings. I have systematic investment plans (SIPs) of 5,000 each in Mirae Asset Large Cap, DSP Midcap (both direct growth plans) and HDFC Corporate Bond (dividend payout). Besides, I invest 5,000 in Public Provident Fund (PPF) every month. I am also planning to invest in gold funds. I am handling my equity portfolio of 1 lakh on my own. I plan to retire by the age of 40. Will I be able to do so with my present investments?

—Neel Mehta

At an annual 12% return (an estimate that’s on the better side), your current investments will grow to about 1.4 crore. This is not enough to retire at the age of 40. There are other factors to consider as well, such as the fact that your savings can increase as your income grows.

At the same time, your current expenditure will not continue to hold at the same level as you grow older or if you start a family. Use online calculators to work out the corpus you will need to retire, and what your SIP amount can grow to at different rates of return. Be conservative in your return estimates. You can work out your savings accordingly or push forward your retirement date by a few years. You can also consult financial planners to draw up a plan for you to reach your retirement goal.

Finally, avoid dividend reinvestment or payout options in mutual funds. They are extremely tax-inefficient, affect your returns, and are declared at the fund’s discretion as it’s not mandatory for a fund to pay dividend.

I am investing 5,000 and 4,000 per month in Canara Robeco Equity Hybrid and Axis Focused 25, respectively, with an annual step-up of 10%. I will need the money in 2027. I am also investing 3,000 every month in Axis Small Cap (15% annual step-up) for my retirement in 2052. I am 28 years old with a moderate risk appetite. Do I need to make any changes to my portfolio?

—Tauseef Akhtar

You’ve done the right thing by going for only a few funds and combining funds of different types. The funds you have picked are good choices. However, given that you are increasing the amount every year, you will later need to increase the number of funds you are investing in. Once your total SIP amount crosses 15,000 (somewhere around the end of third year), add at least two more funds. One of these needs to be a debt fund from short duration or banking and PSU or corporate bond categories. Allocate at least 20% of the total SIP amount in this fund.

The equity funds need to be in the moderate risk category as Axis Small Cap is very high-risk and will account for a good part of your investment for some time. Reassess allocations at the end of five years to check if they are in line with your risk and time frame, and that you do not have concentration in similar funds or styles. Ideally, cap the number of funds in your portfolio at 8-12.

Srikanth Meenakshi is co-founder, PrimeInvestor.in. Queries and views at [email protected]

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