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Different Ways

We take a look at Mr. K.R. Reddy’s portfolio & suggest him on how he can achieve his investment goals

I am 58 years old and have taken pre-matured retirement from the armed forces. Currently, I am working in a software company and my salary and pension are enough to provide for my monthly expenses. I have invested my retirement proceeds of Rs 35 lakh in mutual funds and RBI bonds. Both my sons are married and my financial goal is to plan for my retirement in about two years. I request you to look into my portfolio and suggest restructuring and fine tuning steps.
-K.R. Reddy

Observations:
Good choice of funds
Conservative and risk averse approach
Portfolio cluttered with too many funds
Appropriate Equity-Debt allocation.
Low Large Cap allocation (53%)
Good quality debt papers
Of the 22 funds, 11 have allocation below 5%
Funds' equity holding spread across 267 stocks and debt holdings spread over 124 debt instruments
Diversified sector allocation with top five sectors accounting for 62%

Missing Link
Diversification doesn't mean that the portfolio should have many funds. Few funds can also solve the purpose
Investment should always be done in disciplined and regular way so that you don't worry about your investment in falling market.

Action Plan: Make a reasonable estimation of Income requirement.
Reduce number of funds
Keep few well rated diversified funds with large cap exposure.
Avoid heavy investment in theme based or sectoral funds.
Choose Debt funds with medium or long term horizon for better tax efficiency.
Invest Via Systematic Investment Plan.
Rebalance the debt-equity allocation of your portfolio once in a year.
You can opt for systematic withdrawal plan for taking out money on periodic intervals from funds with growth option, after your retirement. It is tax efficient also.

Rationale
We believe that you are pretty much on the right track. In particular, the equity-debt mix in your portfolio, which is in the right measures to bring you steady returns and protect you against downside risks as well.

However, that said, there are still a few investment mistakes that you have made, which we feel should be rectified. We feel that the basic reason behind the gray areas of your portfolio could be the existence of a few investment myths. Let's try to break those before we move further.



Exisiting Portfolio
Funds  % allocation
Birla Sun Life Income-G 11.66
Reliance Growth-G 8.53
Tata Infrastructure-D 8.18
Reliance Growth-D 7.49
Magnum InstaCash (Cash) 6.88
Kotak Bond Reg-G 6.82
HDFC FMP 26M Aug 2006 Retail-G 5.59
JM Arbitrage Advantage-G 5.12
Templeton India Pension-G 5.05
HDFC Cash Mgmt Savings-G 5.04
Kotak 30-G 3.48
DSPML Top 100 Equity Reg-G 3.47
Sundaram BNP Paribas FTP Series XIII-G 3.25
HDFC MIP Long-term-G 3.05
HDFC Prudence-G 2.98
Sundaram BNP Paribas Equity Multiplier-G 1.97
ICICI Pru Infrastructure-G 1.81
Magnum Contra-G 1.71
Magnum Taxgain-D 1.62
HDFC Taxsaver-G 1.45
DWS Investment Opportunity-G 1.08
Stocks  
Bharti Airtel 2.34
Oil & Natural Gas Corpn. 0.78
Reliance Industries 0.29
Maruti Suzuki India 0.22
I T C 0.13
Fixed Income Instruments  
RBI 6Yrs 8% Taxable Bonds 1000000
PPF A/C 557599
ICICI Bank Term Deposit 300000
Savings 410000
Liability  
Car Loan 100000

Myth 1: Too many funds provide diversification
Most investors hold the misconception that investing in a high number of funds provides diversification. Well, that's not true. Fewer funds of good quality can provide the adequate amount of diversification required. Moreover, too many funds make the portfolio unmanageable.

Myth 2: Lump sum investment is better
Investors with a long-term objective should generally avoid investing in lump-sum amounts. Investing in a systematic and disciplined way is always a better option as it helps in rupee cost averaging, especially in volatile markets. Moreover, with this approach, the unnecessary tension of timing the market is also avoided.

Myth 3: Equity allocation should be trimmed down when investor is close to retirement.
There is a common misconception that investors should minimize equity exposure as they approach the retirement age. But the aim should be to have an appropriate debt-equity mix rather than going too high on debt. High exposure in debt instruments can erode the capital invested due to increasing inflation. But a reasonable equity exposure can counter act the effects of inflation.

Hope we have cleared up a few of your ambiguities and are quite sure that you have understood where you went wrong.



Suggested Portfolio
Fund Name  % allocation
Kotak Flexi Debt Regular-G 23.56
Kotak 30-G 15.78
DSPML Top 100 Equity Reg-G 15.67
Birla Sun Life Income-G 14.51
DBS Chola MIP-G 10.66
Tata Infrastructure-G 5.49
Reliance Growth-G 5.16
JM Arbitrage Advantage-G 4.68
Magnum Taxgain-G 4.51
Total  100.00