I am 37 and my investments are in mutual funds and stocks. I have two saving goals in mind: My child's education (17 years from now) and my retirement (23 years from now). I also invest Rs 27,000 every month in mutual funds through a systematic investment plan.I need some guidance in pruning my portfolio to help me achieve a growth of approximately 14 per cent annually.
KG Manohar
On the quality front, you score high. Though we do spot some mismanagement where quantity is concerned. But upfront, be reassured that you are pretty much on track. Your expectation of 14 per cent per annum seems reasonable too. Going by that return, your current monthly SIPs of Rs 27,000 would cross Rs 1 crore in another 13 years (assuming you invest regularly all through this period in well performing funds).
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Taking Stock
Mutual funds account for 73 per cent of your overall investments while the balance 27 per cent has been invested directly in stocks. Keep in mind that when you maintain a combined portfolio of stocks and equity funds, your funds may have investments in the very stocks/sectors which you have directly bought into. If you do not pay heed to this, your portfolio could get dangerously skewed towards a sector or a particular stock without you being aware of it. Currently, your stock portfolio consists of 16 stocks with a 7 per cent exposure to Reliance Industries (RIL). But when we when we clubbed your stock and fund investments, your overall exposure to the stock goes up to 16.15 per cent.
The same is the case with your sector allocations. Your stock portfolio had a 12 per cent exposure to the energy sector. But when we looked at the overall impact and clubbed it with your mutual fund exposure of 10 per cent to that sector, the energy exposure shot up to 22 per cent. Quite a difference, isn't it?
You must make an effort to track your investments. You can employ the Value Research Online Portfolio Manager tool on this website to arrive at the exact allocation. You will also be able to monitor the market-cap exposure with this tool. Right now, the large-cap component of your portfolio stands at 60 per cent, mid-cap at 31 per cent and small-cap at 9 per cent.
We have always stressed that one should have a ceiling on the exposure to a particular sector, stock or a fund. So you can exit or reduce holdings of certain stocks in case you feel that the exposure to a particular sector or stock is exceeding your pre-determined limit.
Shed Some Weight
Owning 21 funds is not the issue. What matters is the type of funds they are. And you do have some good picks. Nine are 5-star rated and four have a 4-star rating.
But what came across as absurd was that in five schemes you have invested in both, the dividend and growth options. This doubles the fund count unnecessarily. And, since you have time on your side and a regular income too, why did you consider a dividend plan at all?
In case you had some misgivings on this front, let's clear the air. Though a dividend reinvestment and the growth option are identical (as the money continues to remain invested in such schemes), the dividend payout option differs. Once a dividend is declared, the net asset value (NAV) of the fund falls in the same proportion. This way you end up liquidating your own investments. So, the dividend that you get from funds is nothing but your own money coming back to you!
The mistake investors tend to make is to equate a fund's dividend with that of a stock. In the case of stocks, a dividend does not affect the price of the scrip as it is given out of the company's surplus reserves. So, the dividend that you get is over and above the value of your shares. So to make your fund portfolio lighter, we suggest you convert your dividend payout option into the dividend reinvestment option. We also suggest that you exit from UTI Services Sector and UTI Software. They are high-risk sectoral funds which do not have a good rating. You are better off without them. That will leave you with 14 equity schemes (considering growth and dividend reinvestment as the same).
Get Bold
What is lacking in your portfolio is conviction. Out of the 21 fund schemes, 11 of them account for less than 3 per cent each. Likewise, you have six stocks with less than 1 per cent allocation. Such small holdings, even if they appreciate rapidly, would add no value to the overall portfolio.For mutual funds, the best strategy is to invest in a few that have a good track record. Pick two to three funds that can act as your core holdings. You can even throw in a mid-cap fund to add to the aggression. The same principle holds true when investing in stocks. Small allocations add no great value to your portfolio. Continue to invest in stocks only if you have the expertise of managing your stock investments.
Get Balanced
Your portfolio has a negligible debt component of 1 per cent, something that needs to be immediately corrected. Even if you have a long-term plan, you must have some exposure to debt. Do consider some debt fund like Kotak Flexi Debt and ICICI Prudential Long Term. Please ensure that you maintain the debt component as the equity portion would constantly increase on a monthly basis. Here's where the online tool would help tremendously.
Get Going
Decide how much of an exposure you would like to have to debt and maintain your portfolio allocation. As you approach the timeline for your goals, gradually shift the money from equity to debt.
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Stick to your SIP approach of investing in mutual funds and avoid adding any more funds to your portfolio. Your need not change your current SIPs which are all in good funds. Just don't clutter your portfolio with too many stocks and funds.
All the best!
This article was originally published on January 24, 2008.
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