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Reduce Equity Holdings

I am salaried and will retire in five years. I want to deploy Rs 25 lakh to earn a return of 20-30 per cent. I have already invested Rs 85 lakh in mutual funds. Please suggest a strategy- Anonymous.

I am a salaried individual and have around five years to go before I retire. My investments in mutual funds amount to Rs 85 lakh. I will be receiving an additional Rs 25 lakh within a month's time, which I propose to invest in mutual funds. Since I recently purchased an apartment, I need to pay an equated monthly instalment (EMI) of Rs 3 lakh over the next 18 months. This should amount to a lump-sum of Rs 54 lakh which I propose to withdraw from my funds. I already have a home loan which will be fully paid up over the next five years and hence do not want to incur additional liability.

I seek assistance in deploying the Rs 25 lakh so as to earn a return of 20-30 per cent. I would also appreciate advice on my current portfolio.

- Anonymous

Anonymous Portfolio
Funds   Allocation
Birla Advantage-D 0.89
Birla Long Term Advantage-D 0.97
Birla Sun Life Frontline Equity-D 1.22
Birla Top 100-D 2.22
DSPML Small And Mid Cap Reg-D 1.81
Fidelity Equity-D 2.18
Fidelity India Special Situations-D 2.78
Fidelity International Opp-D 1.32
Fidelity Tax Advantage-D 1.86
Franklin India Prima Plus-D 3.84
HDFC Capital Builder-D 0.87
HDFC Premier Multi-Cap-D 1.15
HSBC Advantage India-D 1.36
HSBC Unique Opportunities-G 0.95
ICICI Pru Equity&Deri. Wealth Opt. Ret-G 3.52
JM Small & Mid-Cap Reg-D 2.42
Magnum COMMA-D 2.37
Magnum Contra-D 9.94
Magnum Global-D 4.80
Magnum Midcap-D 8.34
Magnum MultiCap-D 5.44
Reliance Equity Opportunities-D 7.33
Reliance Equity-D 4.70
Reliance Growth-D 10.59
Reliance Long Term Equity-G 4.56
Reliance Vision-D 6.10
SBI One India-D 1.50
Sundaram BNP Paribas CAPEX Opp.-D 2.69
Sundaram BNP Paribas S.M.I.L.E.-D 1.85
UTI Equity-D 0.43
Total  100.00

Before re-jigging your current holdings we would first like to deal with your current and more urgent requirement of deploying Rs 25 lakh. First, let us enlist your requirements for this money. You will need it at periodic intervals over the next 18 months.

Consequently, you need to ensure that the capital value is not eroded and that this money remains liquid. Your equally legitimate concern is to maximise returns from this money.

We hate to be the bearer of bad news but it is not possible to garner a return of more than 7 odd per cent, unless you are willing to risk the safety of your capital. So far, you have been aggressive on the equity front with a marginal exposure to debt instruments.

However, you need to steer clear of equity funds for this additional corpus. Instead you should look at investing in a short-term debt fund with a systematic withdrawal plan (SWP) in place. This automated redemption can be aligned to your payment schedule.

These instruments will insure a reasonable amount of safety of your capital. However, you must be warned that these funds are only the second-best alternative to a flexi bank deposit account. Over a very short time period of month or so these funds can show a negative return. On an optimistic side, you can expect an annual return of about 7 per cent from these two instruments. Also, you will not end up bearing an entry load in these funds. We have divided your corpus equally between Reliance and Birla Sun Life short-term funds.

Looking at 30 funds, the first thought that comes to mind is: did you go on a shopping spree? How did you manage to accumulate so many? We suspect that you have not given due consideration to your existing holdings before investing in a new fund. This, in turn, has translated into an extremely unfocussed portfolio.

With such clutter, keeping track of the laggards and the decent performers becomes a cumbersome task. And your portfolio is a perfect example of this. Funds that have performed exceedingly well have been overshadowed by the average and below average performers. The net result is an average performing portfolio.

A classification of your current holdings will be the best way to explain the extent of duplication. There are as many as seven large-cap oriented funds and an equal number of mid-cap oriented ones in addition to three multi-cap and eight opportunity funds.

Our first step was to unambiguously define your core holdings. For this we took two large-cap oriented funds and two small-cap oriented funds that have a stellar performance track record. These funds have also shown better resilience in a market down turn. To add a little aggression to your portfolio, we kept Fidelity Equity owing to its success in the bottom-up approach of stock picking. In addition to this we chose Franklin India Prima Plus to represent all your multi-cap and opportunity funds. This neat package will be easier to keep track of and should yield much better results.

Redemption Strategy
You should pay the first few instalments of your loan from the systematic withdrawal plan (SWP) instituted out of the Rs 25 lakh investment in the short term debt funds.

In the meantime, you should shift another Rs 29 lakh from your equity portfolio to the short term debt funds over the next six months to completely provide for the Rs 54 lakh you have to pay over the next 18 months. In order to decide which equity funds will go first, pick the open-end funds that are more than a year old. By doing this you will avoid paying a short-term capital gains tax as well as the contingent deferred sales charge (applicable for most close-end funds). After you have redeemed Rs 29 lakh from your equity holdings, you can restructure the residual Rs 56 lakh as suggested by us.

Keep a track on these funds to ensure that they have not slackened in performance. This is rather simple: Check for a Value Research re-rating and the year-to-date performance of the fund vis-à-vis the category.

Suggested Portfolio
Funds  Allocation
Birla Sun Life Short-term-G 14.88
Fidelity Equity-D 11.35
Fidelity Tax Advantage-D 1.89
Franklin India Prima Plus-D 11.39
Magnum Contra-D 11.38
Magnum Global-D 11.44
Reliance Growth-D 11.38
Reliance Short-term-G 14.88
Reliance Vision-D 11.41
Total  100.00