I am 29, married and run my own business. In 23 mutual funds, I have invested lump sum money. I have a few other miscellaneous stocks worth around Rs 1.10 lakh. My Public Provident Fund (PPF) account balance is Rs 5 lakh. I have earlier redeemed Rs 2 lakh from mutual funds.
My wife and I are both covered by health insurance of our own to the tune of Rs 3 lakh. We do not have any other insurance policy. Do we need one? Kindly restructure my portfolio.
I invest Rs 12,000 per month through SIPs. However, I can spare an additional Rs 20,000 per month from my current income for investment.
Ongoing monthly investments of Rs 2,000 each in the following funds
- Birla Sun Life Frontline Equity A
- HDFC Top 200
Religare Business Leaders
Reliance Banking Retail
Reliance Pharma
Reliance Regular Savings Equity
Goals
House
3 years due
Rs 75,00,000
Children's education
20 years due
Rs 50,00,000
Retirement corpus
27 years due
Rs 2,00,00,000
-M.K. Ali
The flaws in your portfolio
With 29 funds and 12 stocks, your portfolio is excessively diversified. This level of diversification serves no purpose and can in fact work against you. Twenty-four funds and eight stocks have an allocation of less than 2 per cent. Even if one of these funds outperforms significantly, it will not have a significant impact on your portfolio returns because of the miniscule allocation.
Next, of the 29 funds, you have made lump sum investments in 23. Investing large amounts of money at one go should be avoided. If the market tanks right after you invest, recovering your losses will take a long time. Even if you have lump sum money, invest it over at least six months.
Why did you invest in closed-end funds such as ICICI Pru Fusion S-III Retail and Sundaram BNP Paribas Energy Opportunities? Closed-end funds do not offer liquidity for a stipulated period. And if they perform well you can't even make fresh investments in them. If instead you had chosen to invest in open-ended funds, you could have invested via systematic investment plans (SIPs) and enjoyed the benefit of rupee-cost averaging.
You also own a number of sectoral and thematic funds - Reliance Banking Retail, Reliance Pharma and three infrastructure-based funds. Although the exposure to such funds is within limits, be warned against the seasonality in the performance of such funds. When a particular sector or theme does well, funds based on them put up great performances. However, when the sector or theme goes out of favour, the NAVs of such funds can decline steeply and remain depressed for long. Such funds are therefore quite volatile in nature and should be avoided.
Finally, you have 12 stocks in your portfolio. Investing in equities directly requires a lot of fundamental research. We hope that you have the expertise and the time to do so yourself. If you don't, then it may be wiser to let the experts (mutual fund managers) handle the task for you. Further, one stock alone - Jai Prakash Associates - accounts for 44.25 per cent of your equity portfolio. For a single stock this is way too high an allocation. You must reduce this exposure at the earliest.
The one element that is missing from your portfolio is a debt fund. While you do have PPF, this instrument does not offer liquidity in the early years, and there is also an annual cap of Rs 70,000 above which you can not invest in it. Hence, do invest in one debt fund. It will counterbalance the volatility of equities and offer liquidity. And when the markets rise too high, you will be able to rebalance your portfolio by selling off equities and investing your gains in the debt fund.
Portfolio revamp
Reduce the number of funds in your portfolio. Stick to a total of six funds. Spread your investment amount, i.e., Rs 32,000 (Rs 12,000 from ongoing SIPs and Rs 20,000 surplus that you can invest) among these funds. We have short-listed three funds from your existing funds that are fine and can remain in the portfolio. You may continue to invest in them and pick three from the remaining funds that we have suggested.
Core funds. Choose any three, preferably one each from the large-cap, multi-cap and tax-saving category, to constitute the core of your portfolio. Core funds should constitute 60-70 per cent of your equity portfolio.
Supporting funds. Pick one fund each from the mid-, small-cap and thematic funds category. Together these funds should not constitute more than 30 per cent of your equity portfolio.
Debt fund. Invest around 10 per cent in the recommended debt fund.
Broadly keep in mind that together your equity funds and stocks should constitute around 80 per cent of your total portfolio.
Once you decide upon your core and supporting funds, start offloading the rest of your holdings. To avoid paying short-term capital gains tax (STCG), begin with funds that you have held for at least one year. The process will take time as you have tax-saving funds which have a three year lock-in period. You also have two closed-end funds for which the redemption dates are a few months away.
As you keep exiting, invest systematically in the six chosen funds.
Key inferences
—Currently your equity investments in the form of mutual funds and stocks are worth around Rs 35 lakh. They comprise about 88 per cent of your entire portfolio.
—All your debt investments (comprising 12 per cent of your portfolio) are in PPF.
—While the number of stocks (12) in your portfolio is less than half the number of mutual funds schemes (29), the stocks comprise around 64 per cent of your equity investments.
—Your portfolio style break up reveals that large-cap stocks account for around 80 per cent of your portfolio, and mid- and small-cap stocks approximately 20 per cent, which is fine.
Core Funds Menu
Large-cap/Large and mid-cap: BSL Frontline Equity Plan A, DSPBR Top 100 Equity Reg, HDFC Top 200
Multi-cap: DSPBR Equity, Reliance Regular Savings Equity, Magnum Contra
Tax saving funds: HDFC Taxsaver, Magnum Taxgain, Sundaram BNP Paribas Taxsaver
Supporting Funds Menu
Mid-and small-cap: Sundaram BNP Paribas Select Midcap Reg, Reliance Growth
Thematic funds/Infrastructure funds: ICICI Pru Infrastructure, UTI Infrastructure
Debt Fund
Debt fund: Fortis Flexi Debt Reg
Are your goals achievable?
Assuming a 10 per cent return per annum on a monthly investment of Rs 32,000 along with your other accumulated investments of around Rs 35 lakh (mutual funds and stocks), you will accumulate around Rs 55 lakh by the end of 2012. You may use this amount to buy a house, provided you do not want to burden yourself with a home loan. However, go for one in case you wish to avail of the tax benefit on a home loan (maximum Rs 1 lakh under Section 80C on repayment of principal and Rs 1.5 lakh on repayment of interest under Section 24 (b) available annually).
If you will follow the above investment strategy until your retirement, you will be able to meet your goals comfortably - corpus for your children (in 2029) and retirement (in 2036). In fact, your retirement corpus will be in excess of Rs 2 crore, without even taking into account your PPF investment. However, find out whether a Rs 2 crore corpus will suffice to meet your needs when adjusted for inflation. If it doesn't, you should consider increasing your monthly investments gradually as your income rises.
Get life insurance
As your family grows, the number of dependants could increase. To protect their future, we suggest that you go ahead and buy a term plan. It is the cheapest and the purest form of insurance that provides much-needed financial support to dependants in case of the breadwinner's sudden demise.
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This article was originally published on August 19, 2010.
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