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Missed Opportunity?

Forget hindsight, focus on goals

I am 42-years-old and I started investing from 2005 to be precise. Though my investments in mutual funds gave a good return within two years, but still I held on to my units. A number of your articles in the magazine and on the website influenced me; which stated that investments in equity should be over a longer time period. Now I wonder if I made a mistake.

I am still going ahead with my monthly SIPs of Rs 10,000 each in DSPBR T.I.G.E.R. and Kotak Opportunities, Rs 8,000 in SBI Taxgain and Rs 5,000 in HDFC Taxsaver. I would like to stay invested for another five years and at that time withdraw 50 per cent of my portfolio since I would need the money for some personal work. The balance amount I will keep invested till I retire after 13 years, for which I am targeting Rs 2 crore. Any suggestions?
- Srinivas Ramagiri

First of all we would like to assure you that holding on to your investments was no mistake. If you think that you should have moved out late 2007 when the markets were said to be overvalued, the same would have applied when the Sensex was at 9,000 or 13,000. It is only in retrospect that one knows when the market peaked.


Existing Portfolio
Fund  (%) Allocation
Fidelity Equity 17.76
HDFC Taxsaver 16.80
HDFC Equity 14.15
DSPBR T.I.G.E.R. 7.28
Kotak Opp. 6.75
HDFC Premier Multi-Cap 6.22
Magnum Taxgain 5.30
HDFC Top 200 4.46
Reliance Equity Opp. 3.81
ICICI Pru Tax Plan 3.80
Magnum Midcap 2.95
SBI Infra. Fund Series 1 2.94
Magnum Contra 2.64
Reliance Vision 2.02
HDFC Prudence 1.95
Tata Service Industries 1.20

Observation
Your portfolio constitutes of 16 funds, which amounts to a total 272 stocks, including the stocks you individually own.
You have 8 funds that are predominantly large cap oriented
You have 3 thematic funds
4 funds have ratings below 3-stars reflecting poor risk-adjusted returns

Solution: Get rid of the clutter
Probably in the hope of being sufficiently diversified, you went overboard in buying funds. So your current portfolio is a combination of a dozen diversified equity funds, three tax saving funds, one balanced fund and two direct stock investments. But more does not necessarily translate into smart diversification. Also, you have the additional burden of keeping track of as many statements every month and monitoring their performance.

Weed out some of the funds. Do away with the thematic funds. Funds that restrict themselves to a specific sector or theme should form a peripheral holding and not be part of your core portfolio. Neither is there any need to hold on to the poorly rated funds. You have also invested in a closed end equity fund which has no past performance history and it should have been avoided.

Observation
Out of the 272 stocks in your portfolio, 246 have an allocation of less than 1 per cent
Reliance Petroleum has an allocation of 13 per cent
Your portfolio tilts towards the energy sector with a 29 per cent allocation

Solution: Avoid skewed allocations
Once Reliance Petroleum and Reliance Industries get merged, this will translate into a very high allocation for a single stock. It's important that you do not let the portfolio take a tilt towards a single company or sector.

Observation
Major part of investments were made in 2005, in the latter half of 2007 and early 2008.

Solution: Stay consistent and disciplined
Stick with the Systematic Investment Plan (SIP). If you do so, the need to time the market is done away with since purchasing at different levels helps in averaging out the costs. It also helps you stay detached from the market ups and downs.

Observation
You don't have meaningful fixed income allocation
Your portfolio has 11 per cent in fixed income by way of bonds and cash in your equity fund portfolios

Solution: Increase your debt allocation
A portfolio must have a mix of equity and debt (fixed income). Since you need a huge portion within five years, you must have a substantial debt allocation. Equity investments are meant for the long term, a period of more than five years. For money needed before that, investments must be made in fixed return instruments since it is less risky.A fixed income allocation also helps curb volatility.

Observation
Your current SIP of Rs 33,000 per month is insufficient to reach your retirement goal of Rs 2 crore

Solution: Increase your SIP
Your current investments, valued at Rs 22.3 lakh and the ongoing SIPs of Rs 33,000 will be worth Rs 1.78 crore in 13 years. So you will be short of Rs 22 lakh from your Rs 2 crore target. An investment of Rs 40,000 per month in good equity funds should help you achieve your retirement goal. If you cannot afford such an SIP, ensure that you save sudden windfalls like a bonus towards this end.

The above calculations are done based on an annual return of 10%. All portfolio related data pertains to April 9, 2009.

Action Points
1)Your new portfolio for retirement should ideally have 6 funds, which you can select from the options below.
2 diversified equity funds: Magnum Contra, HDFC Top 200, DSPBR Equity
2 tax saving funds: HDFC Taxsaver, Magnum Taxgain, Sundaram BNP Paribas Taxsaver
1 aggressive equity fund: Kotak Opportunities, DWS Investment Opportunities
1 income fund: Kotak Flexi Debt, Canara Robeco Income

2) Decide on an equity:debt allocation. You may consider increasing the debt allocation by 10 per cent every three years.

3) Once you decide on your equity:debt allocation, follow up with annual rebalancing to maintain the allocation. As your goal approaches begin selling equity and channelize it into debt.

4) When rebalancing, keep the tax implications in mind. Long-term capital gains tax on shares and equity mutual funds is nil and in the case of income funds, it's less than the short-term capital gains tax.

5) Slowly shift towards fixed income as your retirement approaches. But even after you retire, it is important to keep some money in equity funds so that the portfolio does not give negative inflation-adjusted (real) returns.

6) As you plan to withdraw 50 per cent of your investments after five years, we think that a quantification of the withdrawal is necessary. Once you arrive at a figure, make a separate portfolio with a higher proportion of money in fixed income instruments towards this goal.


Suggested SIP Plan
Funds  SIP (Rs)
2 Diversified Equity Funds 16,500
2 Tax Saving Funds 8,500
1 Aggressive Equity Fund 5,000
1 Income Fund 3,000
Total  33,000