Personal Finance

Should I invest in smallcaps via index mutual funds for wealth creation?

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I am 25. My risk profile is aggressive. I have running SIPs in the following funds: Axis Long Term Equity (Rs 4,000), Axis Focused 25 (Rs 3,000), HDFC Index Fund (Rs 4,000), HDFC Small Cap (Rs 2,000), Mirae Asset Emerging Bluechip (Rs 5,500), Motilal Ostwal S&P 500 Index (Rs 4,000) and SBI Small Cap (Rs 3,500). My take-home salary is Rs 81,000 and I do invest in PPF and FDs as well. I am investing for the last 3 years. Should I increase allocation towards flexi-caps? Would you recommend momentum funds? My horizon is 15-20 years, so is it advisable to go all passive considering the time frame? Also, would you suggest investing in small-caps via index funds? My goal is wealth creation.

Vidya Bala, Co-Founder, replies: Consider increasing your exposure to flexi-caps or even large-cap index funds and prune in small-, mid-and large-and-mid-cap funds. Keep the latter to about 25-30% of your portfolio. Even if you invest in PPF and FD for debt, rebalancing your portfolio will be difficult unless you have some debt funds. Hence add some ultra-short or short-duration funds just to rebalance your portfolio periodically. Passive option is good for those who do not want the hassle of keeping track of investments. At present small-cap funds still have an edge over index. You can have a mix of passive and active funds.

I wish to invest approximately Rs 10,000 per month in international funds with me as the primary applicant and my US citizen daughter as secondary applicant. I am 80 and my primary objective is, that after my demise, the corpus should pass on to my daughter. Please suggest funds I can invest in and how should I ensure there are no complications when it comes to redeeming after my demise?

Raj Khosla, Founder and Managing Director, replies: You can make your NRI daughter a co-applicant for your mutual fund holdings in overseas or domestic funds. For your convenience, make sure you choose the mode of holding as ‘either or survivor’ and not “joint.” The joint application requires consent of both applicants prior to investment or redemption. While in ‘E or S’, any of the applicants can give effect to investment/redemption decisions. After the demise, the funds will pass on to your daughter and will ensure smooth succession. However, you must also understand the implications of investing in overseas funds. Any change in the rupee-dollar exchange rate will also impact your returns. For a less than three years of holding period, beneficiaries are subjected to short-term capital gains tax on the profits at the normal applicable tax rates. As for longer than three years of holding, returns will be treated as long-term gain and taxed at 20%, post indexation.


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