I have sought AI tool's advice on investment in stocks, MFs, FDs in current market conditions. Should I rely on it?

I utilised an AI tool to seek advice on investing $500 per month. After obtaining a recommended strategy, I asked for specific fund names and allocation amounts. I consolidated all the information into a final list. The list is provided below.

Tax-Saving Investments (Rs 8,000 - Rs 10,000)
ELSS Mutual Funds (Rs 6,000 - Rs 8,000)
Mirae Asset Tax Saver Fund – Direct Growth
Quant ELSS Tax Saver Fund – Direct Growth
Axis Long Term Equity Fund

PPF (Rs 2,000 - Rs 3,000) – Safe, long-term, and tax-free

Equity Investments (Rs 15,000 - Rs 17,000)

Direct Stocks (Rs 5,000 - Rs 6,000)

Index Funds (Rs 6,000 - Rs 7,000)
UTI Nifty 50 Index Fund – Direct Growth
HDFC Index Sensex Fund – Direct Growth
HDFC Nifty Next 50 Index Fund

Sectoral/Thematic Funds (Rs 3,000 - Rs 4,000)
Nippon India Pharma Fund – Direct Growth
Tata Digital India Fund – Direct Growth
ICICI Prudential Technology Fund

Mutual Funds & SIPs (Rs 12,000 - Rs 15,000)

Large-Cap Mutual Funds (Rs 5,000 - Rs 6,000)
ICICI Prudential Bluechip Fund – Direct Growth
SBI Bluechip Fund – Direct Growth
Mirae Asset Large Cap Fund

Mid-Cap & Small-Cap Mutual Funds (Rs 5,000 - Rs 6,000)
Nippon India Small Cap Fund – Direct Growth
Kotak Emerging Equity Fund – Direct Growth

International Mutual Funds (Rs 2,000 - Rs 3,000)
Motilal Oswal Nasdaq 100 FOF – Direct Growth
Gold & Fixed Income (Rs 6,000 - Rs 8,000)
Gold Investments (Rs 4,000 - Rs 5,000)
Sovereign Gold Bonds (SGB) – Buy when issued
Nippon India Gold Savings Fund (if SGB not available)
Nippon India Gold BeES ETF

Debt Funds / Fixed Deposits (Rs 2,000 - Rs 3,000)
HDFC Short Term Debt Fund – Direct Growth
IDFC Banking & PSU Debt Fund
Kotak Corporate Bond Fund
Aditya Birla Sun Life Short Term Fund

Could you kindly review this list and confirm if it is suitable to proceed?

Advice by Nilesh D Naik, Head of Investment Products, Share.Market (PhonePe)

Firstly, to arrive at the investment plan, asset allocation and list of funds and securities, it is imperative to understand a lot more details about the investor than just the monthly investment amount. Your investment objective, investment horizon, short/medium/long-term goals, risk tolerance, etc are all important inputs that go into creating an investment plan. Without these inputs, an investment plan will be quite generic and I believe it can be dangerous to follow such generic plans, especially using AI tools.

You can broadly segregate your portfolio into two parts:

The first part is meant to meet short-term financial needs that are likely to arise within say 2-3 years, which is best invested in a relatively low-risk asset class such as fixed income. For this purpose, you could rely on short tenure fixed income funds such as Liquid or short-term debt funds. Arbitrage funds may also be a good option if the investment horizon is over three months. 

The second part constitutes the long-term investments that are meant for long-term goals where it’s apt to invest across different asset classes such as equities, fixed income, gold, etc to be able to achieve reasonably good real returns and to align the portfolio with your risk tolerance, i.e. the ability and willingness to withstand short term volatility in the market.

Equities tend to be quite volatile, wherein historically we have often seen a downside of 40-50%. You should take into account such potential downside and your risk tolerance to arrive at an appropriate equity allocation. Within equity funds, for the core part of the equity portfolio, it is apt to focus on product categories such as flexi cap funds, large cap funds, value or contra funds, large and midcap funds and so on.

For the satellite or tactical part of the equity portfolio, limited exposure to funds in categories such as small cap can be considered depending on your risk tolerance. The rest of the investments in the long-term component of the portfolio can be allocated to core fixed income funds such as corporate bond funds, short-term debt funds, etc, and gold funds or gold ETFs.

As for the AI tool’s advice, I believe there are too many funds on the list, with multiple funds in each suggested category. For most investors, owning 7-8 funds including funds across all asset classes, should be more than sufficient to achieve a right balance of diversification and return optimisation.

Moreover, ELSS funds have a three-year lock-in period. Investors should be aware of this restriction and usually invest in such funds if they need to make tax-saving investments based on their income and tax liability.

Thematic or sectoral investments are generally suitable for experienced investors with a well-established core portfolio who wish to take a tactical position based on their views on a particular sector or theme. It's advisable for most retail investors to steer clear of thematic and sectoral funds in their portfolios.