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Reduce Risky Holdings

Mr. Venugopal, an NRI investor with an above average risk appetite, asks us to review his portfolio

I am a long-term investor (NRI) aged 30 with an above average risk appetite. I plan to stay invested in funds for 15 - 17 years. I plan to start monthly SIPs in Reliance Growth, Reliance Vision, Reliance NRI Equity, DSP ML Tiger and JM Basic and discontinue SIPs in HDFC Top 200, Sundaram Select Midcap and Magnum Global. Should I add Kotak Opportunities or SBI Magnum Contra to the list? I can invest up to Rs 60,000 monthly via SIPs. Kindly advice on my existing portfolio and please suggest changes if needed.
- Venugopal

We have no issues with the quality and quantity of your funds. 55 per cent of your portfolio is invested in well performing 5-star rated funds and having eight funds for a portfolio of Rs. 6.76 lakh, both make good sense. However, we feel that your portfolio is a bit too high on aggression, and we have suggestions to alter the same.

Exisiting Portfolio
Funds  Allocation (%)
DSPML T.I.G.E.R 5.75
HDFC Top 200 17.05
JM Basic 5.95
Magnum Global 15.08
Reliance Growth 14.24
Reliance NRI Equity 17.62
Reliance Vision 6.06
Sundaram BNP Paribas Select Midcap 18.26
Total  100.00

Learning the Basics

Your portfolio comprises of funds which would do extremely well in a bull run, but would crash in a bear phase. This is largely because of the various well performing mid cap funds that you hold, which tend to be more aggressive than large caps. There is no harm if the portfolio comprises of such funds/stocks, but the portfolio should not be heavily skewed towards them. As on April 17, 2008, the mid and small cap exposure of your portfolio stood at an alarming 56 per cent whereas large caps accounted for 39.72 per cent. It is very important that your portfolio has funds which provide stability and reduce the downside risk of the portfolio.

Crash Performance

Your portfolio was quite badly hit in the recent market crash. We calculated the value of the portfolio on January 4, 2008 (assuming you held the same number of units). The portfolio value has fallen by 30 per cent from Rs 9.4 lakh to Rs 6.5 lakh in the period January 4 - April 17, 2008, a time when the Sensex dipped by just 20 per cent. The Sensex gives a broad indication as to how the large caps proved to be more stable. Hence a mid and small cap heavy portfolio is bound to be hit in a struggling market.

Correcting the Flaws

We noticed that there was no regularity in investments (except for the two SIPs). For instance there was no investment for almost 10 months in 2007. Timing the markets is something you shouldn't try. Going ahead, avoid lump sum investments and just stick to the SIP route.

Something you need to rectify is the high mid and small cap exposure. The allocation can be adjusted gradually, if you initiate SIPs in well rated large cap oriented funds..

A portfolio needs to be well diversified across funds and even fund houses. Such diversification would help you benefit from different strategies that each AMC adopts. Thirty eight per cent of your portfolio solely comprises of Reliance mutual funds. Ensure that your portfolio is not dependant on a particular fund house.

Your portfolio has a negligible debt component of 0.97 per cent. Debt is essential as it helps protect your portfolio from the downside. A 10 per cent exposure to a debt fund would make the portfolio look healthier. As you are initiating fresh SIPs you can route some amount to a well rated debt fund.

Plan of Action

As the portfolio is heavy on mid caps, it would be ideal to discontinue SIPs in Sundaram Select Midcap and Magnum Global, as planned by you. Though HDFC Top 200 is a large cap fund and an ideal pick, we opted for a debt fund instead. We have selected all large cap heavy funds which would help in transforming your portfolio to a large cap one. We stayed away from DSP ML Tiger and JM Basic as these are aggressive funds. Both, Kotak Opportunities and Magnum Contra can be skipped as they have relatively high mid and small cap exposure. Other Reliance Funds you opted were completely avoided (though they are well rated consistent performers) because you already have significant portfolio exposure to them.

Another thing you need to take note of is the fund count. We recommend you to exit from aggressive funds like JM Basic and DSP ML Tiger once the markets recover a bit. This would reduce the fund count to 10. Make sure you do not add more funds to the portfolio. We believe these are quality funds which can take care of your investments in the long run. Start investing in these funds via SIP. Keep in mind that rebalancing the portfolio at least once a year is very essential. The equity-debt allocation might swing widely even in a bull or a bear phase. Keep a check on this and rebalance the portfolio as and when required.

Achieving Goals
If you continue to invest Rs 60,000 per month for 17 years, you would be able to create a corpus exceeding Rs 5 crore (assuming a 15% pa return on your portfolio). As you have 17 years by your side, a 10 per cent debt component would suffice. But it is important to have a considerable debt component, few years before you require the money. This would help you in protecting the corpus amount that is created over time. As equities tend to be volatile, start shifting your portfolio gradually to debt around four years before you require the money, to safeguard the created wealth.

Suggested SIP Portfolio
  SIP Amount  Large Cap
  (INR)  Exposure* (Approx)
Sundaram Select Focus 15000 86%
Kotak 30 15000 83%
DSP ML Top 100 15000 83%
Birla Dynamic Bond Retail  15000  Debt Fund
Total  60000  
* As per March 2008 Portfolios