I started investing in mutual funds from November 2005. I want to build a portfolio which is well suited for my mid and long term requirements. For the next two years I do not foresee any need to redeem my fund investments. I am planning to replace Kotak Contra with Kotak 30. I want to move from Birla Long Term Advantage Fund to Birla Frontline Equity Fund but there is some exit load. Should I do this? I also want to move from IDFC Enterprise Equity to IDFC Premier Equity as I think that the latter has performed better. What do you think? I plan to invest 50 per cent of my future salary increments through SIP from now onwards. Please advise me regarding my future investment strategy. Do I need to invest in some balance funds for proper asset allocation? Kindly look into my investment and suggest further change.
Profile of Investor: Salary: Rs 17,000 per month Life Insurance: Rs 2 Lakh Mediclaim: Rs 75, 000 Accidental Insurance: Rs 2 Lakh Fixed Deposit: Rs 30,000 Total Investment in shares: Rs 100,000 Mutual Fund Investment: Rs 90,000 Monthly SIP: Rs 3,000 Dependants: Wife and Daughter
Goal: Medium term: 1. Daughter's school admission 2. Parents' health/medical treatment 3. Meeting expenses on family functions Long Term: - Daughter's higher education and marriage
We are impressed with your judicious investments and selection of term-insurance for risk cover. But your portfolio has some limitations. Overcoming these will sharpen your portfolio to suit your medium and long-term objectives.
1. Too Many Funds There are too many funds in your portfolio. The investment amount of Rs 1.10 lakh is spread across 15 funds which are invested across another 250 stocks. 91 per cent of these stocks have a mere allocation of below one per cent of the total investment. This leads to over diversification in your portfolio. Also holding too many funds result in unnecessary paper work.
Suggestion- Cut down the number of funds. Few well-rated funds will provide adequate diversification to your portfolio and will also make it more manageable by reducing the paperwork. With this you would also be able to closely monitor your funds' performance.
2. Risky Core-holding You have a very high allocation in Kotak Contra (20 per cent) and AIG World Gold Fund (9.17 per cent). This makes the portfolio risky.
Suggestion- Ideally the core holding of an investor's portfolio should be in large-cap oriented diversified equity funds, while other thematic funds like gold funds should only have a small allocation of up to 5 per cent. Also the allocation to contra funds should not be high as they invest in stocks which are out of flavour.
3. Lump sum Investments Of the total investments that you have made till date, 70 per cent is through lump-sum.
Suggestion-Choose SIP over Lumpsum investment Investing through SIP is always advisable over investing in lumpsum, since one is relieved of the burden of timing the market. Also SIP provides the benefit of rupee cost averaging. You don't need to invest in a new fund every time you do an SIP (as has been noticed in your portfolio), you can continue the SIP in your existing funds.
4. Missing Debt Element Your mutual fund portfolio lacks the adequate debt element which makes it quite risky and imbalanced.
Suggestion-Increase debt element You need to have a proper asset allocation between equity and debt even within your mutual fund investments so as to provide adequate balance to your portfolio and also cut down the downside risk. For that you can either choose a well-rated balanced fund or a well-rated medium term debt fund, allocating 10-15 per cent of your investment. Rebalance the portfolio once in six months to maintain the pre-determined asset allocation.
5. Low Large-Cap allocation Your mutual fund portfolio has a low large-cap allocation which makes it volatile and risky.
Suggestion- Increase large cap allocation Since you have a long-term investment horizon you should ideally have high allocation to large-caps as it provides better stability to the portfolio in the long run by reducing the downside risk during volatile markets.
Keeping all these considerations in mind, we have developed a model portfolio for you, which is fine-tuned towards the achievement of your medium as well as long-term objectives.