I have been a regular investor in mutual funds over the past 4 years. I invested mainly via systematic investment plans (SIPs). I also made some bulk deposits towards the end of 2007.
Till date, I have invested a total of Rs 7 lakh, valued at Rs 6.38 lakh today. My concern is that despite investing over a fairly long period of time, which is 4 years, the market value of my portfolio is negative. I have not gained at all, but actually lost money.
My current SIPs terminate next month. I now plan to invest directly in stocks, for which a friend will be assisting me.
How can I restructure my current portfolio to meet the goals that have been set?
— Sumit Khandelwal
We understand your frustration on your portfolio underperforming. But please do understand that if you were investing over the past four years, you would have also invested during the peak of the last boom.
Four years is still a short time in the market. You need to invest consistently over a number of years in different market cycles to actually benefit from a systematic investment plan (SIP). And one-time lump-sum investments are a mistake, unless the market has hit rock bottom and you are psychic enough to know that for a fact.
Now before we move on, it would be wise to first understand where you failed.
Too much clutter
Most investors tend to get bitten by this bug. Going with a smart selection of 5 funds will give you all the diversification you need. Owning 19 is a waste of time and resources.
No significant allocations
Your overall portfolio (portfolios of all the funds invested in) held 269 stocks. But 247 of them held an allocation of less than 1 per cent. Should any of them boast of a mind-boggling return, it would fail to have any significant impact on the portfolio’s overall performance.
Fund house bias
You hold 5 funds from a single fund house which account for almost 40 per cent of your portfolio. A similar thinking pattern tends to influence the fund managers of a fund house. They also tend to get influenced by the same research team and analysts. So a wrong sector call or stock bet could affect all the funds within the house. It is not wise to have such a large portion of your assets in one fund house.
The 8 thematic funds corner almost 40 per cent of your portfolio. This is not healthy diversification and it gets reflected in the skewed sector allocation. Two funds — Reliance Natural Resources and Sundaram BNP Paribas Energy Opportunities, are the main reason you have a 23 per cent allocation to Energy.
You have invested in a few funds which have not even completed 3 years. What made you pick such funds? Was it short-term performance? Were there no better options already in the category? Go for tried and tested schemes.
At times, you have even invested in new fund offerings. Go for NFOs only if they are unique and can add significant value to your portfolio. For example, investing in a technology fund at the end of last decade would have added a new dimension to your portfolio. If you find a particular sector or theme impressive, see if any existing funds already invest in them.
The 6-point plan
- Avoid bulk investing. When investing in funds, stick to an SIP. In this way, your investments will be less prone to extreme market movements.
- Avoid thematic funds and NFOs. Stick to proven diversified equity funds.
- Come up with an asset allocation. Since your goals are far off and you have ample earning years in hand, go with 80 per cent of the portfolio into equities.
- Do not put any more of your savings into fixed deposits. Focus on increasing your equity allocation. Later on, if you need to increase your debt allocation to keep it at 20 per cent, consider a debt fund.
- Once a year, rebalance your portfolio to ensure that the equity:debt allocation for that year is maintained. As your goals approach, the money allocated to equity should gradually start moving into debt.
- If you want to invest directly in the stock market, go ahead. But ensure that you have the time, inclination and patience to research companies and understand industry trends on your own.
How to reach your goals
You would require a monthly income of Rs 50,000 after 25 years.
At an inflation rate of 6.50 per cent per annum, Rs 50,000 will be equivalent to Rs 2.41 lakh.
Keeping that in mind, you need to accumulate a corpus of Rs 4.27 crore over 25 years.
Start investing Rs 35,200 per month. Every year, increase this by 5 per cent. And on an assumption that your savings will earn 10 per cent per annum, all your goals will be met.