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Too Many Funds Lead To Clutter

I am 70-year old with no dependants. I want to improve my lifestyle and travel around the world. At such high levels, I plan to sell some of my funds. Please help me re-structure my portfolio.
-Anonymous

I am a 70-year old retired army officer with no dependants. I want to improve the quality of my lifestyle and travel around the world. Since the Sensex is on a bullish run, I want to book profits in funds that I have held for more than a year. In doing so, I would make a profit of Rs 3 lakh. I intend reinvesting the entire amount (Rs 12 lakh) in the funds mentioned. I need your help in re-structuring my portfolio. I would like to employ the SIP facility for reinvesting.
-Anonymous


Anonymous Portfolio
Funds  % Allocation
Part I  
DSPML T.I.G.E.R Reg.-G 4.47
Fidelity India Special Situations-G 13.39
Fidelity International Opportunities-G 8.92
Magnum Multiplier Plus-G 4.47
Optimix Asset Allocator MMFoF-G 8.83
Reliance Equity-G 8.91
Reliance Growth-G 4.47
Sundaram BNP Paribas CAPEX Opp.-G 4.46
Sundaram BNP Paribas Rural India-G 4.47
Part II  
ABN AMRO Sustainable Development-G 5.03
HSBC Unique Opportunities-G 10.44
ICICI Pru Fusion-G 13.19
Magnum Taxgain-G 8.95
Total  100.00


Welcome to the club! Almost everyone wants to book profits. After such a heady bull run, expecting a bear phase to follow is but natural. And, it would be wise to have ample liquidity to take advantage of cheaper valuations. Your strategy of booking profits and then systematically injecting it back into equities could indeed be profitable. But this strategy makes sense only on the basis of a very crucial assumption: That the market will start sliding from this juncture.

We are totally behind you when you say you want to try a Systematic Investment Plan (SIP). Discipline and consistency is the best way to tackle equities. But as to the direction of the market, no one can say for sure where it is headed.

Having said that, if you want to sell your investments and reinvest the money, then it is an opportune time to restructure your portfolio.

More Not Always Better
A mistake many investors tend to make is accumulating a lot of funds. The fund selection may be great but the combined effect on the portfolio may not be as impressive. Take four top-of-the-line funds for instance: Birla Sunlife Frontline Equity, Magnum Contra, HDFC Equity and Reliance Vision. Great holdings, but including all of them in one portfolio leads to clutter.

When streamlining your portfolio, the very first thing we did was to club the funds into various categories.



Anonymous Portfolio
Funds  % Allocation
Part I  
Birla Sun Life Frontline Equity-G 7.86
DSPML T.I.G.E.R Reg.-G 3.94
Fidelity International Opportunities-G 7.87
HDFC Equity-G 7.85
Magnum Contra-G 7.88
Magnum Global-G 7.88
Optimix Asset Allocator MMFoF-G 7.79
Reliance Diversified Power Sector-G 3.97
Reliance Growth-G 3.94
Reliance Vision-G 3.94
Sundaram BNP Paribas Select Midcap-G 3.94
Part II  
ABN AMRO Sustainable Development-G 4.44
HSBC Unique Opportunities-G 9.20
ICICI Pru Fusion-G 11.63
Magnum Taxgain-G 7.87
Total  100.00
First we delineated the inflexible aspect of your portfolio - the close-ended and ELSS class of funds. Then we dropped funds that are at odds with your portfolio. A case in point is Optimix Asset Allocator Multi Manager Fund, which invests in a wide variety of funds and derails the focus of your portfolio.

Then there are the infrastructure plays (DSPML T.I.G.E.R, Sundaram BNP Paribas CAPEX Opportunity) and opportunistic funds (Fidelity India Special Situations, HSBC Unique Opportunities, ICICI Pru Fusion) which invest in stocks across sectors and market capitalisation. Fidelity India Special Situations was dropped because it is rather aggressive with a tendency of taking concentrated bets (34 per cent in financial services in the July portfolio).

Don't Ignore Costs
Your decision to redeem funds that you have held for more than a year will save you on taxes but result in stable performers like Magnum Multiplier Plus being dropped. Once funds are clearly demarcated, they can be eliminated on the basis of performance, investment objective, sector exposure, risk weight of the fund, and the overall effect on the portfolio. Once you do that, you can look at redemption charges which are very significant in the case of close-ended funds. It is precisely for this reason that ABN AMRO Sustainable Development has been retained. But to be fair, the fund's performance this far has been in line with the category average.

Since short-term capital gains tax is 10 per cent of gains, start redeeming the oldest funds first.

Plough Back
In order to reinvest systematically, you could redeem units and place the money in a short-term debt fund. From this kitty you can route investments into equities with a Systematic Transfer Plan (STP) which works like an SIP. We suggest that you undertake this exercise over the next six months, so that your money can be invested in equities as soon as possible.



Suggested Portfolio
Funds  Allocation (%)
ABN AMRO Sustainable Dev.-G 4.50
DSPML T.I.G.E.R Reg.-G 11.77
HDFC Equity-G 15.72
HSBC Unique Opportunities-G 9.19
ICICI Pru Fusion-G 11.44
Magnum Multiplier Plus-G 13.60
Magnum Taxgain-G 7.83
Reliance Growth-G 11.99
Reliance Vision-G 13.96
Total  100.00