I am a 32-years old married IT professional. I have been investing in mutual funds since 2005. Around November 2007, I booked profits and reinvested the principal as well as the profits in 18 funds, as advised by my agent. I want to remain invested for the next 17-20 years. I want my portfolio to give me a return of 20 per cent per annum. I have a moderate to high-risk exposure. Please review my portfolio and suggest appropriate changes, if required.
Mr. Das, you might have heard of the saying: 'Too many cooks spoil the broth'. Well, at the moment, this saying applies to your mutual fund portfolio. Not your entire investment portfolio, mind you, but just your mutual fund holdings, which require quite an intensive rectification. However, there is nothing to be overly worried about. We have worked out a modus operandi for you that will enhance the performance of your mutual fund portfolio.
But let's first address your expected and desired rate of returns; that of returns at 20 per cent per annum. At the moment, your current portfolio is tilted towards debt with 62 per cent of your entire portfolio allocated to debt. The major cause of this tilt is the fixed deposit investments.
Refurnish your Asset Allocation
Your approximate debt:equity allocation comes to around 60:40. Now assuming a 20 per cent annual rate of return from equities and 8 per cent from debt, your current portfolio will give you a return of approximately 12.8 per cent per annum, which is far less than what you expect from your investments. To enhance this rate of return, we suggest that you invest the income from your fixed deposits in mutual fund schemes using the Systematic Investment Plan (SIP) route. This will enhance the returns you earn from your portfolio and furthermore, the SIP mode of investing will significantly reduce the risk associated with equities as well.
Opt for Fewer Funds
Now, let's take a look at what's wrong with your mutual fund portfolio and how can put it right. The 37 per cent of your entire portfolio is dedicated to your mutual fund holdings, but it is done through way too many funds - 18 in all. This means that each mutual fund has a miniscule impact on your portfolio. Hence, you need to cut down the list to seven or eight large-cap oriented equity diversified funds with a proven track record.
As far as the diversification aspect is concerned, the portfolio is fine. But when the same diversification can be achieved from fewer funds, why bear the unnecessary burden of managing so many funds and tracking each one of them?
To address these issues we have created a model mutual fund portfolio for you. We have started out by squeezing down the number of funds from 18 to seven. All the chosen funds are high on quality and with proven track records. Five out of the seven funds are large-cap equity diversified schemes, one is a sector fund and one a dividend yield fund.
The large-cap equity diversified funds are picked up to make the portfolio performance concentrated. ICICI Prudential Infrastructure Fund, the sector fund, will add flavor to your portfolio while UTI Dividend Yield Fund, an equity diversified fund with a mandate to invest in high dividend yielding stocks, will act as a counter balance in the market downside. Since the markets are always unpredictable, keeping a fund like this as a core holding will reduce the downside risk of the portfolio.
We have not changed anything in your stock holdings as you have picked all blue-chip stocks for a long-term purpose.
Stay Away from ULIPs
The last thing you need to do is shun Unit Linked Insurance Plans (ULIPs). ULIPs are a mix of insurance and investment, which sounds to be good. However, they are an expensive investment avenue as the recurring charges and commission for agents eat away most of your money.
Moreover, you don't need them because you already have a term plan from Life Insurance Corporation; this takes care of your insurance needs while equity, mutual funds and fixed deposits are there to take care of your investment needs.
If you still need more insurance, you can avail this benefit through the mutual fund schemes that offer insurance cover for investments through Systematic Investment Plans, wherein the premium for the insurance is also borne by the AMC.
We hope we have been of help and have cleared up your ambiguities. We're sure that given your long-term time horizon, your investments will bear fruit and meet your expectations. Just remember to review and rebalance your portfolio once every year