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Rebalance Portfolio Every Six Months

23 year old Ayush Kedia has invested in funds since Nov 07. He asks us to review his portfolio

I am a 23-year old IT professional with no dependants. I began investing in mutual funds in November 2007 and would like to regularly continue to do so. Right now, I invest Rs 12,000 per month. My financial goal is to buy a house in Bangalore in a few years. Kindly review my fund selection and suggest the necessary changes. I want to get maximum returns by taking calculated risks.
- Ayush Kedia

You have two things going for you: Your age and a disciplined approach to investing. Starting financial planning at a young age always pays in the long run. The power of compounding coupled with a systematic approach to investments (especially in equity) would help you achieve your goals with ease. But one needs to be realistic and patient when it comes to creating wealth. Be prepared to stay invested for at least five to seven years.

Your Portfolio….
The Monthly SIP of Rs 12,000 has been allocated to 10 funds, including three tax-saving funds.

All your investments are done via SIPs.

Funds like Reliance Diversified Power, Reliance Banking and Principal Tax Savings seem to be selected solely on the basis of huge returns generated in 2007.

The portfolio has no debt component and doesn't consist of any balanced fund.

The portfolio comprises of 56 per cent of large caps and 33 per cent of mid caps.

The portfolio has a high exposure to financial services (22 per cent) and energy (15 per cent).

Sector fund Reliance Banking contributes to the high allocation to financial services.

You have invested in 10 funds through which your corpus is spread across 237 shares.

Reliance Growth and Fidelity Tax Advantage have a negligible portfolio allocation of 4 per cent. Further, seven of the 10 funds have a portfolio allocation of less than 10 per cent. Out of the 237 stocks, 216 have a meager portfolio allocation of less than 1 per cent.

Existing SIP Portfolio  Amount (INR)
Birla Mid Cap-G  1000
Fidelity Equity-G  2000
Fidelity Tax Advantage-G 500
Magnum Contra-G 2500
Magnum Tax Gain-G 2000
Principle Tax Saving-G 500
Reliance Banking-G 1000
Reliance Diversified Power Sector-G 1000
Reliance Growth-G 500
Sundaram BNP Select Focus-G  1000

Our Observations…..
For that amount, we recommend a portfolio of four to five funds. Tracking 10 SIPs every month and maintaining adequate balance on respective dates isn't that simple.

The SIP route is an ideal way of investing in equity funds.

Avoid investing in a fund just because it has outperformed its peers over a period of six to eight months. Star ratings, past performance (at least three years), peer performance and comparison of return vis-à-vis the benchmark are key considerations.

A pure equity portfolio with a three-year horizon can prove to be risky if the stock markets struggle.

The dominance of large caps adds stability to the portfolio. The table "Crash Performance" shows how your funds performed in the recent market meltdown.

To achieve proper diversification and to mitigate risk, the portfolio should never have a high exposure to any single sector, stock or fund. One should set a ceiling and rebalance the portfolio allocation (if required) once every six months.

Sector funds are wholly dependent on the performance of a single sector and are, hence, far riskier than diversified funds. For instance, banking funds were worst hit in February when the sector turned bearish post-Budget. Avoid investing in these funds and leave the sector picking to diversified fund managers.

The fund count is a concern. Increasing the number of funds is not smart diversification. It leads to over diversification and makes portfolio management tougher.

Set a threshold limit for exposure to a particular fund. A portfolio would not benefit much from a 4 per cent allocation to a fund, even if it were to double in a year. Ditto with the stocks.

Our suggestion
Take a home loan to purchase your house. Continue with the SIPs but let them accumulate over a longer period of time. You should expect an annual return of 15-20 per cent for a holding period of 5-10 years from

well-performing diversified equity funds. Anything above that would be bonus!

Plan of Action
Consolidate your portfolio
You have already selected various consistent performers and so we are just picking up five funds for your current portfolio. Three of these are equity diversified and the remaining two for tax planning.

Our suggested portfolio has a combined investment in 175 stocks (your existing portfolio has investments in 237 stocks). The portfolio has a 64 per cent large cap exposure which making it more stable. We could have managed with just four funds for a portfolio of Rs 12,000, but we opted for two tax savers as we wanted to diversify your tax savings. We also removed all sectoral funds from your portfolio. Consequently, the exposure to financial services sector has been toned down to 18.51 per cent.

Suggested SIP Portfolio  Amount (INR)
Fidelity Equity-G  3000
Magnum Contra-G 3000
Magnum Tax Gain-G 1500
Principal Tax Savings 1500
Sundaram BNP Select Focus-G  3000

Discontinue your SIPs
Do not get into the hassle of redeeming your investments. Just discontinue the SIPs in some of the existing funds. To do so, contact your agent or send an application to the fund house. Ensure that you submit the application at least 30 days before the SIP due date.

Hang on for the long term
You want to buy a house in a few years. If you continue to invest Rs 12,000 via monthly SIPs for three years, your investment of Rs 4.32 lakh would be Rs 5.79 lakh. We arrived at this figure on the assumption that your equity diversified portfolio would generate an annual return of 20 per cent going ahead. So redeeming the investment after three years does not seem to be a good idea. Further, if you redeem the investments made via SIP in the third year, the gain on the SIPs deducted in the third year would attract a short term capital gains tax at the rate of 15 per cent ( effect from this financial year).