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Get Your Basics Right

34 years old Pawan Pokhriyal has been investing in mutual funds without any proper knowledge. He wants to generate Rs. 1 crore & asks us to review his portfolio. Here's what we have to say

I am 34 years old and investing in mutual funds through a monthly SIP of Rs 10,000 from January 2008 without having a good knowledge. Whatever I learnt, it's from your website only. In the next 15 years, I want to generate Rs 1 crore so that I can enjoy my retirement period. Please advice me on my fund selection and are my investments on track to achieve the target?
-Pawan Pokhriyal


At the age of 34 some would say it's late to start planning your goals. But seeing your systematic approach to investment, we are glad that you have started well. Your target seems achievable, given the fact that you have a 15 year time horizon. The SIP approach is perfect but we have some suggestions especially relating to the fund selection and the fund count. We believe you need to get some basics right so that the portfolio is balanced and helps you achieve your goal.

Exisiting Portfolio
Funds  SIP Amount (Rs)
JM Financial Services Sector-D 2000
Reliance Diversified Power Sector-D 2000
Reliance Growth-D 2000
Magnum Taxgain-D 1000
DSPML Tax Saver- D 1000
Principal Tax Savings 1000
Sundaram BNP Paribas Taxsaver-D  1000


You started invested in January 2008 - a time when the Indian markets were at all time highs. The BSE Sensex was an inch away from the 21,000 mark when the downtrend started. A lump sum investment around that time would have probably given you jitters by now. The recent meltdown is a perfect example as to how quickly the bears can overtake the bulls and how wonderfully the SIP technique works when such a rough patch hits the market.

Fund Selection
One look at your funds, and we were clear about the criteria you used while selecting the funds. It was - The recent bull phase returns. Funds like JM Financial Services, DSP ML Tax Saver and Reliance Diversified Power were clearly amongst the toppers of their respective categories in 2007. But what you missed was looking closely at their mandate before investing. The JM fund and the Reliance Diversified Power are sectoral funds and hence far more risky than the diversified ones. DSP ML Tax Saver is extremely heavy on mid and small cap stocks which makes it one of the riskiest tax savers. The table (How They Went Down) presents a clear picture as to how these winners of 2007 became laggards in the crash.

Quite clearly such funds have fallen sharply than the category average during the crash (barring Reliance Diversified Power). So your fund selection is a bit on the aggressive side. Your holding of the mid cap heavy Reliance Growth makes the portfolio further aggressive. So these funds should not be the core holdings. Some of the well rated tax savers can also act as core holdings of the portfolio.

Consolidation of Funds
You have selected seven funds for a SIP of Rs 10,000. Such a fund count makes managing and tracking the bank clearance of SIPs every month a tough job. Divison of investment into seven funds has also led to over diversification. You will be amazed to know that the overall investments of these funds have been done in 240 stocks! So Rs 10,000 per month in 240 stocks. One can imagine how small the allocation would be to majority of these stocks.

The consolidation might seem to be a daunting task right now but once done it would make portfolio management easier and simpler. First do not redeem the investments already done in your selected funds, instead just discontinue the future SIPs (this can be done by submitting a simple letter to the AMC or the registrar) and start afresh. Also, as the new financial year is about to start, you can plan your tax saving SIPs accordingly.

A maximum of three or four funds are enough for your portfolio. We are choosing four (See Suggested Funds) only because we wish to diversify your tax saving investments into two funds.

Becoming a Crorepati
If you continue your current SIP investment for 15 years and we assume a conservative annual return of 20 per cent from the funds you would almost achieve the target. The amount generated after the term would be Rs 95.54 lakh. However, increasing the SIP amount by Rs 1000 would help you achieve the target with ease. We are recommending four funds for your monthly SIPs.

Now see how the smaller portfolio works. This portfolio will give you a large cap heavy portfolio with an allocation of 65 per cent. The portfolio consolidation has worked as the combined investment of these funds is only in 152 stocks, as against 240 earlier.

Finishing Touches
You have a long term plan. Opting for the dividend option (reinvestment) in case of tax saving funds is justified as it helps you save extra taxes. But do not opt for a dividend payout option in your other diversified funds as it would liquidate your investment and hamper the overall growth prospects. Best is to stick to the dividend reinvestment or simply the growth option.

Suggested Funds
Funds  SIP Amount (Rs)
SBI Magnum Tax Gain 2000
Sundaram BNP Tax Saver 2000
Reliance Vision 3500
HDFC Top 200 3500


Another thing you need to take note is portfolio rebalancing. Though the current portfolio is large cap dominant, you must ensure that you re-balance the portfolio if required. It is advisable to check the same once in six months.

How They Went Down
  2007  Crash  Category
  Return  Performance  Avg in Crash
DSP ML Tax Saver 83.61 -38.65 -33.27
JM Financial Services Sector 95.19 -39.18 -30.85
Reliance Diversified Power 124.42 -30.52 -30.85
*Crash Period - Jan 8 - March 24