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Milking Money Maturely

Here is what a young man with a cash-heavy portfolio should do to raise returns and minimise risk.

I am 28 years old, single and have no financial obligations as of now. I have been investing in mutual funds for the last 5 years both as a lump-sum investment as well as through systematic investment plans (SIPs). Majority of the lump-sum investments were done in January 2008, but the market crash that followed reduced my portfolio value to less than half.

However, the current market rally has helped me get an overall return of 3 per cent.

I have a healthy cash balance of Rs 10 lakh in my bank accounts. I wish to consolidate my mutual funds portfolio by exiting some funds and investing in others. Suggest a portfolio makeover, as well as an ideal asset allocation, that will work to achieve my goals, all of which will fall due after about 5 years.
- Himmat Singh

A similar set of problems is faced by many people despite some differences in portfolio holdings. In your case, the fund selection is not all bad, but there are bugs that affect its efficiency:

Identifying Problem Areas

High on Debt / Cash
In your portfolio, the first thing that catches attention is the (un)healthy bank balance. For your age bracket and investment time-frame, you can comfortably allocate much higher amounts to equities within the portfolio. Since you will be invested in equities for a very long period, as you are very young, the cyclical risks related to equity returns will get moderated to a large extent and they could hence prove to be the most-profitable asset class for you.

Current Portfolio
Mutual Fund Allocation (%) Rating
Large Cap Diversified
Reliance Vision 12.88 * * *
Fidelity Equity 10.76 * * * *
Franklin India Flexi Cap 10.13 * * *
Thematic / Aggressive Fund
DSPBR T.I.G.E.R. Reg 12.36 * * * *
Reliance Diversified Power Sector Retail 7.96 Not Rated
DSPBR Opportunities 7.71 * * *
DSPBR Small and Mid Cap Reg 7.60 Not Rated
Magnum Midcap 6.20 * *
Reliance Regular Savings Equity 3.00 * * * * *
Reliance Banking Retail 2.24 Not Rated
JM Emerging Leaders 1.73 *
Tax Planning
Fidelity Tax Adv 6.62 * * * *
Reliance Tax Saver 5.77 * * *
HDFC Taxsaver 2.98 * * * *
Magnum Taxgain 2.02 * * * *
DSPBR Money Manager Ret 0.05 *
Reliance Liquid Cash 0.02 *

Di(wo)rsified Portfolio
Pun is intended, but it also highlights another problem with it. With 3 diversified equity funds, 8 aggressive or thematic funds and 4 tax planning funds, your portfolio will require more time and effort to track. Through these 15 funds, you own 272 stocks. This might look like an adequately diversified portfolio. But 252 of these stocks have an allocation of less than 1 per cent. Should any of these stocks perform exceptionally well, it will fail to have any significant impact on the portfolio returns.

Liquid Funds
You own 2 liquid funds as well. Right now, they do not seem to be serving any purpose in your portfolio. If this money is meant for emergency purposes, remember that it is not as liquid as the money in bank accounts as you will get the redemption proceeds only after one working day.

To park very-short term money and get good returns, you can invest in liquid plus funds. Unlike liquid funds, they will keep some portion of your investment in instruments with a maturity of more than 91 days and hence get classified as debt funds which are more tax-efficient.

Thematic / Aggressive Funds
With 8 such funds constituting about 45 per cent of your equity portfolio, they carry the potential of a huge and unwarranted risk. But having a small portion of your portfolio, say 20 per cent, through one or two funds, can boost the returns in a rising market.

Bulk Investing
On hindsight, the beginning of January, 2008 was not the best of times for effecting bulk investments. However, remember that there is no best time to invest a lump-sum amount, unless you have a sure-shot foresight of netting a winner. So, always avoid investing in bulk. Use the systematic investment plan (SIPs) route for equity investments. This will help avoid getting carried away with the market ups and downs. Investing at all market levels, up as well as down, will also help in keeping your portfolio returns stable.

Restructuring the Portfolio
Keep rated diversified large-cap funds as the core of the portfolio and invest in one or two aggressive funds (Value Research rates funds according to their performances – Star Ratings). For tax planning purposes, invest in not more than 2 equity linked saving schemes. While the equity exposure will help you get good returns, adding a debt fund will provide stability to the gains.

Do not add more funds to your portfolio as some that you already own can form the base for a restructured portfolio.

Asset Allocation and Rebalancing
The money not meant for generating immediate income, or the amount that is not to be used in the foreseeable future, should be kept in equities.
Although we suggest that you keep about 80 per cent in equities, you should, however, yourself come up with an asset allocation that fits well with your risk appetite.

When you have done that, and also decided what the debt proportion will be, gradually move the money from your bank accounts to equity funds via SIPs. Also, maintain this asset allocation by rebalancing it regularly. This way, whenever the markets rise quickly, you will be moving extra gains to debt and when the markets fall, you will be investing more in equities.

Suggested Portfolio
Fund Choices  Number of Funds
Large Cap Diversified Funds  3
Fidelity Equity 
Reliance Regular Savings Equity 
Magnum Contra 
HDFC Top - 200 
Tax-Planning Funds  2
Fidelity Tax Advantage 
HDFC Taxsaver 
Magnum Taxgain 
Aggressive Fund  1
DWS Opportunities 
Kotak Opportunities 
Debt Fund  1
Kotak Flexi Debt 
Canara Robeco Income