Follow a core and satellite approach to build a mutual fund portfolio
27-Dec-2010 •Research Desk
I want to invest Rs 8 lakh in mutual funds for the next three-four years. I am a moderate risk taker. I am not considering investments in ELSS or any PSU fund house. I am considering investments in DSPBR Top 100 Equity, HDFC Top 200, Birla Sun Life Frontline Equity Plan A, IDFC Premier Equity Plan A, Birla Sun Life Dividend Yield Plus, HDFC Equity, HDFC Prudence and Reliance MIP. How much should I invest in each of them? Should it be in lump sum or as SIPs? I am worried about investing with the Sensex at such high levels.
- Pratik Kumar
For a moderate risk taker you should not be considering lump sum investments at all. Regular and systematic investments in mutual funds go a long way towards wealth creation and you should be considering that. You can park the lump sum that you have in a liquid fund and consider regular systematic transfer plans, especially when the markets are hovering around past highs. Your selection of funds is good. However, we are unable to understand the reason for selecting eight different funds. If you think this is a way to diversify, you will observe that the selected portfolio of funds has a mid-cap bias. There are two mid- and small-cap funds, two large- and mid-cap funds, and a multi-cap fund. These are only duplicating your investments and creating a market-cap bias that is risky.
We suggest you follow the core and satellite approach wherein you have about 60-70 per cent of your holdings in large-cap funds and the remaining in mid- and small-cap funds. This way you will have a portfolio that is built on a strong foundation with a few funds in the satellite domain that provide the necessary kicker to your portfolio returns. Reduce your holdings to just four or five funds. Have a financial goal for which you need this investment and monitor the performance of these funds at least once every six months. Make modifications if needed.