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Hold On, Don't Be a Tiger

Minimize your portfolio's exposure to one particular sector, is one of our advices to Varun Mahajan

I currently hold the following investments in mutual funds and stocks. These are my queries:

What is your opinion of my portfolio? I intend to hold on to this investment for a minimum period of five years.

Do I need to do away with certain funds?

How can I diversify my portfolio?

I intend to invest around Rs 5,000 per month through an SIP. Can you recommend some funds where I can invest this amount? The time horizon for this investment is above five years.

I plan to buy some more funds to the value of Rs 30,000. Can you recommend some?

-Varun Mahajan

You have opted for some good funds with a proven track record. With five 5-star rated funds, your portfolio is high on quality. Since five of your funds are equity linked saving schemes (ELSS) with a lock-in period of three years, nothing can be done with these funds for now.

Existing Portfolio
Fund/Stock  % Allocation
Magnum Taxgain-G 17.50
Reliance Petroleum 14.53
DSPML T.I.G.E.R. Reg-G 11.61
Sundaram BNP Paribas Taxsaver-G 10.00
DSPML Top 100 Equity Reg-G 9.92
DSPML Tax Saver- G 9.85
Principal Tax Savings 8.91
Reliance Diversified Power Sector Retail-G 7.54
Magnum Contra-G 6.42
HDFC Taxsaver-G 3.73
Total  100.00

A significant aspect that you must make note of is that your portfolio is heavily skewed towards the energy sector with an allocation of 33 per cent. A very high allocation to a single sector makes your portfolio risky and imbalanced and the overall performance is too excessively dependent on solely one sector. This high exposure comes from your investment in one stock: Reliance Petroleum. Also, two of your funds, Reliance Diversified Power Sector Fund and DSPML T.I.G.E.R are high on energy. We suggest that you cut down your exposure to the energy sector.

Your portfolio is already fairly diversified so you don't need to do much on that front. To begin with, consider moving out from the above two funds to reduce your allocation to Energy. By doing this, your portfolio allocation to this sector comes down to 24 per cent, which is not too high. Also the number of funds will be simultaneously reduced to seven, from nine, making your portfolio easier to manage.

Since your portfolio is already diversified, please do not add any new funds. Also avoid lumpsum investments in the future and invest the amount through a systematic investment plan (SIP) into the two existing diversified funds - Magnum Contra and DSPML Top 100 Equity Fund. The SIP will give you the benefit of averaging out the cost of purchase.

Another aspect to be taken care of in your portfolio is its equity-debt component. You have a very high exposure of 88 per cent to equity and a mere 3 per cent to debt. This makes your portfolio too risky. Increase the debt component by adding a fixed income fund in your portfolio. You can also consider fixed deposits, which are safer options with a return of around 8-9 per cent per annum. At least 15-20 per cent of your investment should be in debt.

Also, keep rebalancing your portfolio every year to balance out the equity-debt component.

The money to buy the new funds will come from selling your current investment in two funds (approx Rs 38,000) and the amount you have as surplus cash to invest (Rs 30,000).

Suggested Portfolio
Fund/Stock  Portfolio
Principal Tax Savings 28.08
Kotak Flexi Debt Regular-G 13.56
Magnum Taxgain-G 11.76
DSPML Top 100 Equity Reg-G 11.31
Reliance Petroleum 9.76
Magnum Contra-G 9.70
Sundaram BNP Paribas Taxsaver-G 6.72
DSPML Tax Saver- G 6.62
HDFC Taxsaver-G 2.51
Total  100.00