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Choose Quality Over Quantity

Unrated funds, low debt component & dependence on one sector result in a high risk portfolio

All right, first things first; this is not one of the finest portfolios that we have come across. Unrated funds, low debt component and overdependence on one particular sector mean that the portfolio is high on risk. Here is a detailed synopsis...

Synopsis
A large cap oriented portfolio of 23 mutual funds and 36 stocks. The portfolio has an ideal blend of growth and value stocks.

Overall, including mutual funds investment in stocks, the portfolio is invested in 367 stocks. 96 per cent of these stocks have a portfolio allocation of less than one per cent.

Sixteen of the 23 funds i.e. 70 per cent of funds are unrated. 80 per cent of the portfolio is invested directly in equities.

There are far too many funds than required. The portfolio comprises of some quality fund picks but they have a negligible portfolio share. 14 of the 23 funds have a small allocation of less than one per cent.

Large caps account for 80 per cent of the overall portfolio, the remaining being in mid and small cap stocks. 23 per cent of the portfolio is solely invested in Reliance Industries.

The portfolio has a negligible component of debt. This increases the downside risk.

The portfolio is highly skewed towards the energy sector, which constitutes 40 per cent of the portfolio.

Fund investments have been made at irregular intervals. At the same time, new funds have been picked up for investing at regular intervals.

Now that we know about your portfolio, here are a few pointers about what you should have done...
Strategies
Small allocations would not add any value to the overall portfolio. If a fund outperforms but has a meager allocation, the portfolio would not benefit from it. Make sure you allocate a significant part of the portfolio to a stock or a fund.

Avoid speculating and stick to funds that have proved their mettle. Invest in well rated funds.Look at a 3-5 years performance history and ratings before investing.

Quality is more important than quantity. Investing and managing so many funds can become a tedious task.

Invest in fewer funds and do not get lured to the new fund offerings. Add a new fund to your portfolio only if it adds a unique diversification.

Some significant component of debt is always helpful to a portfolio. Debt plays a major role in a bearish stock market and provides the cushion when markets tank.

Ensure that the portfolio has a healthy debt component irrespective of the risk that you can handle. You can also invest in government debt instruments like bonds, fixed deposits or NSCs, but they are not tax efficient.

Once you are done with the equity debt allocation, make sure you re-check the allocation and re-balance the portfolio (if required) at least once a year. This should also be done when stock markets crash or rise rapidly in a small interval.

Being regular is the key. It is not possible to time the markets, nor should one try to do so. Be regular and systematic. Even if you prefer doing one time investment at times, you should also have SIPs to complement those.

The SIP approach can also be adopted in stocks (of course it is not as simple as a mutual fund SIP). If you consistently buy a stock on a regular basis, it would help you average the cost over time. Make sure you do enough research before choosing a stock or consult an expert.

Set a ceiling on exposure to a particular sector or stock/fund. High exposure would make the portfolio largely dependent on its performance.

Do not track your mutual fund portfolio every day. Tracking funds' portfolio once in six months should suffice. The Value Research Portfolio Manager would be handy.

Do not worry about short term fluctuations. Market sentiments can change overnight. If you are a long term investor you should not worry about the market gyrations

Now that the investing strategies are clear, here's how you should put the same into action...
Implementation
Consolidation of the portfolio is the first step. Redeem small holdings (like Sundaram BNP Paribas Capex and Fidelity International Opportunities) and invest in five or four star-rated funds. This would be a onetime exercise. As per your investment value, 7-8 funds are enough for you.

While consolidating, make sure to start with those funds which you are holding for more than a year. This would help you save on taxes.

As markets have tanked, you can wait for few months and let them stabilize. You can also opt for inter scheme transfer. For example you can initiate a transfer from Reliance Equity to Reliance Vision on a monthly basis (do note that STT would be charged on such transfers).

You could have skipped funds like DBS Chola Tax Saver, Franklin India High Growth Companies, Fidelity Tax Advantage. These were new offerings with no track record. Ensure that you invest in well rated funds.

Start SIPs in well rated funds. Some plain vanilla picks which have been great performers are Reliance Vision, HDFC Equity, Sundaram Select Focus and SBI Magnum Contra. These funds should be a part of the core holdings of your portfolio.

Investing directly in equities can be risky. Majority of your portfolio is invested directly in equities; make sure you have put in enough efforts before picking stocks. If you have the expertise of managing and churning a stock portfolio, you can remain invested.

It is very important to decrease the exposure to energy stocks. Most of the contribution is by the direct stock exposure to energy sector. Set a ceiling of around 15-20 per cent for each sector. The sector has been badly hit in the recent crash .

Your portfolio needs to have a significant debt component. Opt for some five star rated debt funds like Birla Sun Life Income, Kotak Flexi Debt or ICICI Prudential Long Term. These funds would provide the required stability. A minimum of 10 per cent debt would be ideal.