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I am 42 and most of my money was invested before May 2006 crash. I plan to purchase a house before retirement and set aside money for my children's education, too. How is my portfolio?
-Harith

I am a 42-year-old government servant. I have Rs 6.5 lakh in PF and investments worth Rs 2.18 lakh across 20 funds. Unfortunately, about 40 per cent of this was invested just before May 2006 crash. After that I chose the SIP route for investments. I have opted for the dividend option to meet a part of my annual expenditure. I plan to purchase a house before retirement and also wish to set aside money for my children's education. Please review my portfolio.
-Harith

Sometimes, lessons are best learnt the hard way. Luckily for you, in a short span of a year the equity market has zoomed past the 12,000 mark to hover around 15000 levels.

Harith's Portfolio
Funds  % Allocation
Part I  
Franklin India Prima Plus-G 6.39
Franklin Infotech-D 0.64
Kotak 30-D 6.42
Magnum Contra-D 12.80
Magnum Global-D 12.84
Magnum IT 3.21
Reliance Diversified Power Sector-D 0.64
Reliance Growth-D 6.40
Reliance Vision-D 0.64
Sundaram BNP Paribas Select Midcap-D 12.77
Tata Equity Opportunities-D 0.64
UTI Infrastructure-D 0.64
Total  64.03
Part II  
Franklin India Taxshield-D 0.64
HDFC Taxsaver-D 0.64
Kotak Tax Saver-D 0.64
Magnum Taxgain-G 25.69
Principal Personal Tax Saver  0.64
Reliance Long Term Equity-D 3.68
Reliance Tax Saver-D 0.64
SBI One India-D 3.40
Total  35.97
Details Of Monthly SIP  Amount (Rs.)
Franklin India Taxshield-D 500
Franklin Infotech-D 500
HDFC Taxsaver-D 500
Kotak Tax Saver-D 500
Magnum Taxgain-G 500
Principal Personal Tax Saver  500
Reliance Diversified Power Sector-D 500
Reliance Tax Saver-D 500
Reliance Vision-D 1000
Tata Equity Opportunities-D 1000
UTI Infrastructure-D 500
Total  6500


Where you have done well
You have been wise in opting for an SIP. Sometimes, people burn their fingers and then exit from equities totally. You have made an astute move by not exiting but investing systematically.

Also, you have smartly identified your short- and long-term financial goals, the very first step in financial planning.

Where you have gone wrong
While you have been wise in choosing SIP as the medium to invest, your strategy is awry.

Your current choice of funds is aimless because you attempted to de-risk your portfolio by going for numbers. Instead, inculcate a habit of investigating the fund's objective before investing. The absence of this exercise has landed you with a high-risk portfolio of predominantly mid- and small-cap companies.

Secondly, while you have identified your financial goals, your investments are not targeted to meet these goals. The investments made so far are haphazard. Learn to align your investments to your goals. For instance, your current strategy of meeting miscellaneous annual expenses through dividends is unwise. It amounts to dipping into profits which have been set aside for a different purpose. Moreover, mutual funds are not under any obligation to declare dividends.

Getting on track
Switch to growth options: Asset management companies (AMC) do not charge investors for switching between the growth and dividend option of the same fund. So our advice is to switch to the growth option, unless you find more lucrative options of reinvesting the dividends earned. Avoid using dividends to meet other expenses.

If you still insist on receiving money through dividends, then restrict this to the dividend proceeds from your tax planning and close-ended funds. Since you cannot redeem these funds, you can at least take away the dividends.

Alternative source for short term needs: Make a reasonable estimate of your miscellaneous annual expenses. On the basis of this, you can invest in a liquid fund. Another option could be to institute a recurring bank deposit.

Restructuring the portfolio: The suggested portfolio will be achieved after one year. Instead of churning the current portfolio, we have redirected your SIPs to restructure your portfolio. This will minimise the cost of restructuring by reducing entry loads.

In our revamped portfolio, we have dropped sector funds in favour of large-cap oriented equity diversified funds. We have also done away with funds that have a marginal allocation. Instead of 11 monthly SIPs, your objective can be met by just four funds. Maintain it for a year after which you can review them and preferably choose a multi-cap fund.

You can look at funds from Fidelity and Franklin for this. We would have ideally recommended Magnum Contra and Magnum Global for future SIPs, but your exposure to SBI mutual funds is already very high. We remain skeptical about your investment in SBI One India Fund whose performance has been nothing to write home about. The only reason for remaining invested here is the large exit load payable. Talking of exit load, sell only those funds that have been held for more than a year to avoid incurring short-term capital gains tax.

Meeting your goals
Based on the ages of your children, you will require funds after 6 and 14 years. In order to avoid market timing during redemption, institute a systematic withdrawal plan (SWP). An SWP works exactly like an SIP with monthly and quarterly options. For making a down payment on your home, we suggest that the withdrawals through SWP are reinvested in debt instruments.

Suggested Portfolio
Funds  % Allocation
Franklin India Prima Plus-G 13.47
HDFC Taxsaver-D 10.99
Kotak 30-G 3.61
Kotak Tax Saver-D 11.3
Magnum Contra-G 7.23
Magnum Global-G 7.23
Magnum Taxgain-D 14.44
Reliance Growth-G 6.63
Reliance Long Term Equity-D 2.09
Reliance Vision-G 12.35
SBI One India-D 1.94
Sundaram BNP Paribas Select Midcap-G 7.27
UTI Infrastructure-G 1.45
Total  100.00
SIP  Amount
Franklin India Prima Plus-G 1500
HDFC Taxsaver-D 1500
Kotak Tax Saver-D 1500
Reliance Vision-G 2000
Total  6500