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Diversify & Invest Systematically

Mr. Mody wants to invest for his family & family trust. We assess his portfolio & suggest appropriate changes

I am a 77-year old retired businessman. I am in a position to further invest directly in shares or mutual funds to the extent of Rs 50,000 per month. My ultimate objective is to will all my assets (fixed, investments in shares and mutual funds) to my two sons and daughter. I also plan to donate an amount to our family educational and charitable trust. Other than this, I have no other responsibility or liability to discharge. Keeping my objectives in mind, could you please suggest if I should opt for the growth option for my mutual fund investments?
-Brahmdeo Mody

OBJECTIVE
To invest Rs 50,000 every month
To attain better tax efficiency
To will the entire investment to children and make a donation to a trust

OBSERVATIONS
15 mutual funds with 9 from HDFC MF
Good fund selection with a number of them being 5- and 4-stars
22 stocks, with L&T having the highest allocation and most having a miniscule representation
Significant large-cap orientation
Blended investment style

THE PROBLEM
Lack of diversification
The portfolio is not smartly diversified. The mutual fund allocation is very biased towards one Asset Management Company (AMC) - 9 funds from HDFC Mutual Fund. In totality, the diversified sector accounts for almost 27 per cent of the total allocation. With 24 stocks, a number of them have a negligible allocation while one single stock, Larsen & Toubro, accounts for 23.23 per cent of the total stock allocation.

Clutter
There is no need to have 15 funds, along with individual investments in stocks. A fewer number of well performing funds is more efficient and easier to manage.

Irregular investments
Lump sum investments are often made at irregular intervals. If you have a fixed amount in your mind that you would like to invest, then the investment must be done periodically and efficiently. Timing the market and investing ad hoc never benefits the portfolio in the long run.

Frequent churning of portfolio
This does no good to a portfolio. And, it increases the tax burden too. Frequent churning results when investments are not systematic and disciplined and there is no asset allocation in mind.

Existing Portfolio
Mutual Fund Holdings  
Funds  % Allocation
HDFC Cash Mgmt Savings Plus Retail-DW 33.33
HDFC Taxsaver-G 14.44
HDFC Prudence-G 11.11
HDFC Equity-G 10.00
HDFC Top 200-G 8.89
HDFC LT Advantage Fund-G 3.33
HDFC Infrastructure-G 2.78
Reliance Long Term Equity-G 2.78
Sundaram BNP Paribas Select Focus Reg-D 2.78
Sundaram BNP Paribas Select Midcap Reg-D 2.78
HDFC Growth-G 2.22
HDFC Capital Builder-G 2.22
DSPML Small and Mid Cap Reg-G 1.11
IDFC Enterprise Equity-G 1.11
Fidelity Equity-D 1.11
Combined Equity Alllocation  
Stocks  % Holdings
Larsen & Toubro  23.30
Reliance Industries  8.07
ICICI Bank  5.81
Tata Consultancy Services  5.75
Reliance Petroleum 5.29
ONGC 3.47
PNB  3.45
Grasim Industries 3.30
Siemens 2.57
Dr. Reddy's Lab  1.65
Others 37.34
Equity Allocation of Mutual Funds and Stocks

THE SOLUTION
Consolidate
Why? It will enable you to conveniently manage your investments. Invest in a few funds with a very good track record. Gradually move away from stocks and keep a portfolio of mutual funds.

Invest Systematically
Why? In the long run, the investor benefits by investing regularly since the principle of rupee cost averaging comes into play. It also brings about a disciplined investment pattern and avoids the stress of attempting to time the market.

Estate Planning
Why? Since you are already very clear on where you would like your assets distributed, you should get it formalized. Draw up a will clearly stating your beneficiaries and who gets what share of each asset. You can state nominees for your current investments. For future ones, you can decide whom to put as a nominee. For instance, you can invest with three different folio numbers considering each child as a nominee.

Move out of FD
Why? You will attain better tax efficiency by doing so. Fixed deposits attract higher taxes. Instead, invest in Fixed Maturity Plans and other short- or medium-term debt funds.

Rebalance
Why? Needs and circumstances change. Keeping that in mind, rebalance your portfolio once a year. It will also ensure that the predetermined asset allocation is maintained. This will also curb the need to frequently churn your portfolio.

Invest in growth option
Why? It is advisable to opt for the growth option of a mutual fund scheme unless your source of income is the dividend you receive. Or, unless it is a close-ended fund and you would like some return during the period your money is blocked.


Suggested Portfolio
Funds  % Allocation
Magnum Contra-G 22.29
Kotak 30-G 16.94
Kotak Flexi Debt Regular-G 16.82
Sundaram BNP Paribas Select Focus Reg-G 16.43
Reliance Growth-G 16.41
Magnum Taxgain-G 11.11
Total  100.00