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By investing in funds and stocks, I have invested a decent amount of corpus over time. But, now I feel that my portfolio consists of too many stocks and funds. Kindly suggest, how I can fine tune my portfolio. Also guide me if I should exit or add some more

By investing in funds and stocks, I have invested a decent amount of corpus over time. But, now I feel that my portfolio consists of too many stocks and funds. Kindly suggest, how I can fine tune my portfolio. Also guide me if I should exit or add some more
- Mr. Bansal

There is often a very fine line between a well diversified portfolio and an over diversified one. And in most cases, the investor is unable to differentiate between the two. The same can be said for Mr. Bansal. With 13 equity diversified funds and 61 stocks in a high value portfolio, Mr. Bansal might be under the impression that his is a well diversified portfolio. Unfortunately, it is not! His portfolio is invested in 242 stocks (inclusive of the investments made by mutual funds), with 92 per cent of these stocks having a portfolio allocation of less than one per cent. This makes his portfolio an over diversified one.

The good news is that the portfolio is high on quality. With 70 per cent exposure to large cap stocks through quality equity funds and direct investments in good companies, your portfolio is right on track quality-wise. However, you need to check on the over allocation to a single company. Reliance Industries alone accounts for 18 per cent of the portfolio. Your portfolio is largely dependent on a single sector as well. Nearly 30 per cent of the portfolio is invested in the energy sector. High exposure to a single company and/or sector should be avoided because it makes the portfolios largely dependent on it and increases risk.

The one thing missing from the portfolio is a debt component. Debt provides stability and helps you rebalance the portfolio when required. To further optimize your portfolio we have devised three plan of actions. Evaluate each plan carefully and choose the option that suits you best.

Plan 1: Direct Equity Investments
Generally, an investor should invest directly in equities only if he has the expertise of managing and researching the various companies himself. One must be confident about investing directly, as it requires a high risk appetite and a heart which can handle market gyrations. If you are comfortable with this, go ahead and build a complete equity portfolio. Considering the fact that most of your investments are invested directly in equities, you can redeem your remaining investments from mutual funds and shift them to high quality stocks.

In your case, consolidation is the key. For investment in equity, a portfolio of around 20-25 stocks would suffice. Your equity portfolio already consists of investment worthy companies which you can consider and shortlist for investment. For the same, you should gradually liquidate your investment in mutual funds and stocks. Do ensure that if you exit funds or stocks before one year of holding, you would be liable to pay short-term capital gains tax of 15 per cent on gains. So do take note of the date of investing before exiting and reinvesting your current holdings.

Plan 2: Actively Managed Equity Funds
Consider this plan if you are willing to keep things simple and do not want to get into the hassles of monitoring your investments on a regular basis. Opt for mutual funds. By solely investing in quality funds, you would also ensure that you achieve proper diversification as required and also benefit from the professional management that they offer.

Suggested Funds Portfolio
Funds  Allocation(%)
ABN Amro Flexi Debt 7.50
Birla Frontline Equity 11.00
Birla Sun Life Tax Relief 96  4.02
DSPML T.I.G.E.R. 10.00
Fidelity Equity  10.00
Kotak Flexi Debt 7.50
Magnum Global  10.00
Magnum Multiplier Plus  10.00
Reliance Growth  10.00
Reliance Vision  10.00
Sundaram BNP Paribas Select Focus 10.00

To implement this strategy, you should exit your direct stock investment and then invest in equity mutual funds. Again, this procedure should be gradual and you should avoid investing the entire corpus in one go. Opt for a systematic investment plan and spread your investments over the 6-12 months.

To construct a pure fund portfolio, choose not more than 10-12 well rated equity diversified funds after properly evaluating their past performance. You have already invested in quite a few well performing funds. We recommend a portfolio of 11 funds (including 2 debt funds) for your investments. We have only included one new fund i.e. Birla Frontline Equity and have dropped funds like Reliance Diversified Power and Sundaram Capex Opportunities as these are riskier sector funds.

Plan 3: Index Funds
Another option worth considering is exchange traded index funds for investment. Index funds are a passive way of investing in a market index like Sensex or Nifty. Such funds invest in underlying stocks of an index, according to their respective weightage in that index. This way, the return generated by these funds is in-line with the movement of associated market index. The funds being ETFs are traded on the bourses and provide you with an easy exit and entry options, just like direct investments in stocks.

Suggested Funds Portfolio
Funds  Allocation(%)
ICICI Prudential SPIcE (ETF) 35.00
Nifty BeES (ETF) 30.00
Junior Nifty BeES (ETF) 20.00
Kotak Flexi Debt 15.00

For this, we are recommending a few well performing exchange traded index funds which have Nifty, Junior Nifty or Sensex as their benchmark. ICICI Prudential SPIcE, NIFTY BeES are some of the ETFs we shortlisted for you. You can consolidate your investments and move them to index funds and selected debt funds.

Debt Allocation & Portfolio Rebalancing Now let's take up the issue of debt allocation to the portfolio. Irrespective of the option you choose from the above three, we recommend you invest in debt as well. A considerable debt component is very important to reduce the downside risk, provide stability, and rebalance the portfolio as and when required. You can decide and fix the equity-debt allocation that suits you best (say 85 per cent equity - 15 per cent debt). As you do not have any fixed income investments and are fully invested in equities, you must include debt in the portfolio. For this you can consider some well rated debt funds like Kotak Flexi Debt, ABN Amro Flexi Debt or Birla Sun Life Income.

Once you decide on the equity-debt allocation for the portfolio and have the desired debt component in place, you must keep a check on the portfolio as well. For this, check whether the allocation is intact, once every six months. A sudden surge or a meltdown in equity markets could require rebalancing of the portfolio to match your desired equity debt bifurcation. The Value Research Online portfolio service would come in handy here.