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Increase Debt

After having invested in mutual funds for three years, Harish Zope has accumulated several funds. We review his portfolio & give him a few suggestions; increasing debt being one of them

I have been investing in stocks and mutual funds for almost three years. As a result I have accumulated several funds. Would you review my portfolio and share your observations? Please also suggest necessary changes. I would also like your opinion on the number of funds I have invested in.
-Harish Zope


You must be pleased with the performance of your portfolio. The fund portfolio itself gained 56 per cent (as of December 24, 2007)

Existing Portfolio
Funds  % Allocation
Birla Mid Cap-G 1.75
DSPML Balanced-G 1.88
DSPML Savings Plus Moderate-G 1.59
DSPML T.I.G.E.R. Reg-G 0.76
Fidelity International Opportunities-G 0.73
Fidelity Tax Advantage-D 1.43
Franklin India Flexi Cap-D 1.14
Franklin India Flexi Cap-G 2.06
Franklin India Prima Plus-G 3.15
Franklin India Prima-G 0.69
Franklin India Smaller Companies-D 0.68
HDFC Equity-G 4.82
HDFC MIP Long-term-G 2.80
HDFC Prudence-G 4.89
HDFC Tax Saver-D 1.14
ICICI Pru Tax Plan-D 0.96
Kotak 30-G 4.16
Kotak Lifestyle-G 1.25
Magnum Global-G 2.75
Magnum Taxgain-D 1.07
Morgan Stanley Growth 0.43
Reliance Growth-G 6.55
Reliance Tax Saver-D 1.10
Reliance Vision-G 5.92
Sundaram BNP Paribas CAPEX Opp.-G 0.63
Sundaram BNP Paribas Select Midcap-G 3.42
Tata Pure Equity-G 2.87
Sub total  60.62
Stocks  
Balrampur Chini Mills 0.17
BPCL 0.62
Cadila Healthcare 2.52
Finolex Inds. 0.50
Godrej Consumer Products 0.09
Hindustan Oil Exploration Co. 0.79
ICICI Bank 4.32
IDBI 0.81
Reliance Capital 0.53
Reliance Communications 3.38
Reliance Energy 7.11
Reliance Industries 13.01
Reliance Natural Resources 0.78
Tata Steel 4.75
Sub total  39.38
Total  100.00


But what struck us instantly is that your investments are skewed towards equity. Though your portfolio has over 63 per cent in large-cap stocks, it is quite low on debt. A modest debt component is essential in the portfolio, which right now stands at just 4.7 per cent.

Right Balance
When analysing an equity portfolio, we look at two parameters: sector exposure and the number of stocks/funds held.

A common misconception among investors is that they can achieve instant diversification simply by owning a large number of funds and stocks. But that need not be the case. A smart portfolio is one which is not cluttered with too many holdings and well diversified amongst sectors and investment styles. You have a huge bucket of 26 funds, much too big indeed. Your logic must be that you would prefer to diversify across various fund houses. But we do feel that you have gone overboard.

Monitoring the performance of all these funds (along with your stock portfolio) must be extremely time consuming. In addition, you have 16 funds which have a portfolio allocation of less than 2 per cent. Such small investments don't help the portfolio generate better returns in anyway.

. You seem to own just a few stocks; 14 to be precise. But when looked at in combination with your funds, your entire portfolio takes on a different complexion.

If we combine all the stocks, including the ones in the fund schemes, your stocks total to an astonishing figure of 366! Further, 167 of these stocks have a meager allocation of under 0.05 per cent. What would be the gain of such a small allocation to your portfolio? Zilch. Finally, when looking at all the stocks, what emerges is the exposure to the energy sector, which currently accounts for nearly 30 per cent of your overall investments.

. Investing Strategy
A possible reason why you have accumulated that many funds is probably because you tend to buy new fund offerings (NFOs). It is always better to invest in a fund which has proven its worth. Let prove our point with numbers. If you had invested the same amount that you put into the four NFOs (excluding tax saving NFOs) in HDFC Prudence (on the respective dates), you would have got an additional 8 per cent of return. Had we considered a pure equity fund (HDFC Prudence is a balanced fund), the returns generated would be higher.

Having said that, don't pick up an existing fund purely on the basis of its recent performance. Sundaram BNP Paribas Capex Opportunity seems to be a case in point. Look at a fund's consistency of performance over a few years. You can also look at the star rating that we allocate to funds.

Once you decide on the fund, be a disciplined and regular investor and avoid investing money at one go. We notice that you invested 20 per cent of your portfolio in a period of 30 days (November 2006). You were lucky! Thanks to the booming market, your investments paid off well. In the future, avoid such major investments in such a short span of time. Spread it out or opt for a Systematic Investment Plan (SIP).

Though your equity investments have paid off well, you should be more cautious. Do so only if you have the time and inclination to research a stock. If not, stick to the mutual funds route.

Action Points
We recommend that you increase your debt exposure. You can do so by increasing exposure to funds like DSP ML Savings Plus Moderate and HDFC Prudence.

You can consolidate your small fund holdings. We have reduced your fund holdings to 16 funds.

To mitigate the sector risk and ensure that your portfolio is well diversified, set a limit for exposure to any one particular sector. Once you cross that limit, you can make the relevant adjustments to the portfolio. You can do this at ease by using the Value Research Online Portfolio service available on this website. But we recommend that you analyse your portfolio once in six months and not too often.

Suggested Portfolio
Funds  Allocation (%)
DSPML Savings Plus Moderate-G 5.65
DSPML T.I.G.E.R. Reg-G 1.57
Fidelity Tax Advantage-D 1.43
Franklin India Prima Plus-G 6.34
HDFC Equity-G 4.82
HDFC MIP Long-term-G 4.17
HDFC Prudence-G 6.77
HDFC Tax Saver-D 1.14
ICICI Pru Tax Plan-D 0.96
Kotak 30-G 4.16
Magnum Taxgain-D 1.07
Morgan Stanley Growth 0.43
Reliance Growth-G 6.55
Reliance Tax Saver-D 1.10
Reliance Vision-G 5.92
Sundaram BNP Select Midcap-G 8.55
Sub total  60.62
Stocks  
Balrampur Chini Mills 0.17
BPCL 0.62
Cadila Healthcare 2.52
Finolex Inds. 0.50
Godrej Consumer Products 0.09
Hindustan Oil Exploration Co. 0.79
ICICI Bank 4.32
IDBI 0.81
Reliance Capital 0.53
Reliance Communications 3.38
Reliance Energy 7.11
Reliance Industries 13.01
Reliance Natural Resources 0.78
Tata Steel 4.75
Sub total  39.38
Total  100.00


Following these steps can make your portfolio look better. In the long run, its best to be a consistent and a regular investor.