I am an NRI and have been regularly investing in mutual funds over the past five years. I am worried about my portfolio's high allocation to the energy sector (21%). I am also confused as to how I should line up my SIPs so that there is a fine balance and I am not skewed towards one sector.
I realise that my portfolio lacks a substantial debt exposure but since I have good number of years to invest, I think I should wait for some recovery in the equity market before shifting to debt. Please note that investments in mutual funds are the only source of my future income. So please help out with some advice. Your site has been my mentor and I really appreciate the work you guys are doing.
- Sanjeev Suri
Residential Status:Non Resident Indian
Marital Status :Married
Monthly Investment :Rs 80,000
Dependents:2 (Wife & Son)
You are a very aggressive investor. Not only is this apparent in your high equity exposure but even in the way you invest. You invested in HDFC Top 200 after switching in from HDFC Equity. The investment in Reliance Diversified Power Sector was a switch from Reliance Growth. The amount that went into Reliance Regular Savings Equity was from Reliance Diversified Power Sector and Reliance Growth. While Sundaram Select Focus was a switch from Sundaram CAPEX.
Though at the time of making the switch, you might have been very impressed with the performance of the scheme, in the long run this will not pay off. You need to pick a few good funds and stick with them. Only if there is consistent underperformance should you consider moving.
Focus on core funds
Every investment strategy must focus on a few core holdings while the balance funds can be periphery ones that add zest to the overall portfolio. The core holdings should be plain vanilla diversified equity funds that have a proven track record. They should preferably be large cap oriented too. The supporting funds can be thematic, sector or mid-cap funds. Since they are more volatile and their performance is also dependent on the fortunes of a particular sector or theme, the risk in such investments is higher. In your portfolio, the topmost funds are Magnum Contra (15.83%), HDFC Top 200 (14.65%), Reliance Growth (13.31%) and Reliance Diversified Power Sector Fund (12.81%). Magnum Contra and HDFC Top 200 can be your core holdings, but certainly not the other two. Reliance Growth is a mid-cap fund and Reliance Diversified Power Sector Fund is a thematic fund.
Debt has a role too
Your portfolio has a miniscule debt allocation (4%). Had you invested in other fixed return instruments, this would not have been an issue. But the fact is that you have no other debt exposure. We suggest at least a 20 per cent debt allocation to balance the 80 per cent equity exposure. But to maintain this exposure, you will have to rebalance your portfolio once a year. If you find that once again the equity exposure is too high, then increase the debt exposure or sell some equity. As you begin to approach your goal, gradually start decreasing your equity exposure and put more of your money in debt. In other words, your asset allocation will tilt more heavily towards debt as the years go by.
It's very important for a long-term investor to have a systematic investment approach. Not only does this enforce a discipline but it also delivers good results since one is investing when the market is low and high. For instance, if you invest Rs 10,000 per month systematically for the next 16 years, you would end up with Rs 46 lakh (with an expected annual rate of return of 10%).
You are concerned about the tilt towards a particular sector. You are right in wanting to be diversified. But if you decide on a few core holdings and a few supporting funds, you will automatically achieve that goal. After all, you will be diversifying across funds from different fund houses and investment styles. So work on putting together your core portfolio and deciding which funds should be the additions. The rest will fall into place.
How to achieve your goals
The aim of your investment strategy is to provide for your child's education and a sound retirement corpus for yourself. Since they are two separate goals, we recommend that two different corpuses be maintained.
The first and smaller corpus will be for child's education which is 15 years down the road. If you save Rs 10,000 every month towards it, you will accumulate around Rs 45 lakh in this time frame. Decide how much you would like to save towards your goal once you have a concrete figure in mind. You can pick up two equity funds for this purpose.
Your retirement corpus will obviously be much larger and it also has a longer time frame, 25 years. If you invest Rs 70,000 every month for the next 25 years, you will be sitting on a corpus of Rs 8.78 crore. This investment can be made in five funds. You can have two or three core funds, one debt fund and the remaining can be supporting funds.
The final corpus figures are based on two assumptions. The first is that the investments are made consistently every month over the time frame mentioned. The second is an assumed compounded annual rate of return of 10 per cent.