I have recently read your magazine and am very impressed with the information and analysis. I would really like some guidance. Please advise me on whether or not the allocations are appropriate. You could also suggest some changes which may be useful. I am 74 years old and have other sources of income to meet my regular expenses.
Congratulations. You do own a wonderful basket of funds. In fact, it is rare that we come across a portfolio which has such quality fund picks.
Within two years of investment, your portfolio return stands at a remarkable 52.4 per cent (as on November 2, 2007). This should be an example to all investors as to how a good fund selection can yield high returns.
Going by your excellent fund picks and the great performance track record, your portfolio does not need any major changes. But we do have some suggestions on how you can fine tune it.
We believe that every portfolio should have some sort of a balance between equity and debt to reduce the downside risk. No portfolio should be solely in either asset. However, the actual allocation between the two will depend on your age, income and appetite for risk. This is where you need to make a change. At over 90 per cent, your current portfolio is very heavily tilted towards equity.
Further, 40 per cent of your overall holdings consist of mid-cap stocks and 12.67 per cent, small caps. So your portfolio is quite risky and unbalanced.
The first thing you need to do is to re-balance your portfolio between equity and debt (refer to the cover story to understand this point in greater detail). We recommend that you exit from ICICI Prudential Emerging STAR as it is a relatively new fund. Moreover, its performance had been quite volatile due to its high small- and mid-cap orientation.
Instead, you can shift the corpus from ICICI Prudential Emerging STAR and invest it in HDFC Prudence, which is one of the top-performing balanced funds. Increasing the amount in HDFC Prudence will automatically increase your debt component and make your portfolio look healthier and will reduce the downside risk considerably.
We believe you need to increase your debt component further. So we suggest that you channelise a portion of your portfolio to Birla Sun Life MIP and ICICI Prudential MIP. MIPs are primarily debt- oriented funds with a small equity allocation (between 10-20 percent). While choosing an MIP, don't just look at the performance, but do check the asset allocation patterns. (Read Category Watch on MIPs)
All funds handled by one asset management company (AMC) have a common research team and a chief investment officer (CIO). But to have an element of diversification in a portfolio, it is wise not to have a huge exposure to just one fund house. An AMC may also have some great funds at a particular point in time which could fall out of favour later. So not only does it make sense to diversify amongst funds, but even amongst fund houses. Not only do you benefit from the different research philosophies and styles of investment but it also lowers the risk.
Currently, you seem to be very keen on HDFC funds. Around 60 per cent of your current portfolio is invested only in HDFC funds. And 33.4 per cent of the portfolio is in HDFC Equity. So your portfolio is very largely dependent on the schemes of HDFC Mutual Fund and on the performance of HDFC Equity.
We recommend that you sell some investments in a phased manner and explore more investment opportunities available. While shifting the corpus, make note of exit loads and the capital gains tax to be paid. Currently the tax on equity funds is 10 per cent if you exit within one year of investment and it is nil if you sell after one year of investment. In your case though, as all of your HDFC funds have exceeded one year of investment, you would not be liable to pay any capital gains tax or exit loads. We suggest that you shift some amount to Reliance Vision and Birla Sunlife Frontline Equity to give your portfolio a more diversified tilt.
Timing the Market
Going by the fact that you are not a regular investor, luck has certainly been on your side. A huge chunk of your investment, 46 per cent to be precise, has been invested within a period of 33 days. This strategy could have backfired badly had the markets tanked post your investment.
Fortunately for you, the markets have been on a roll since then. The Sensex has zoomed by over 41 per cent from the date of your investment (as on November 2, 2007). But in future, please avoid taking such risks and spread your investments over months by adopting a systematic approach.
Take a systematic investment plan (SIP) whereby you invest fixed amounts every single month. So whichever direction the market takes, you will be consistently investing.
End of the day, there is no substitute to being a disciplined and consistent investor.