I am 35 and salaried with a monthly income or Rs 85,000. I wish to invest for the long-term to save for my retirement and also repay my home loan early. I want to increase my investments by Rs 5,000 a month and add some more funds. Is it the right approach? I am planning to invest in Reliance Gold fund, is it a good option?
- Sudhir Seethepalli
Your portfolio is well spread and you have also made 30 per cent gains on your investment holdings, which is very encouraging. This should instil confidence in you and the belief that investing systematically in mutual funds is the way to long-term wealth creation. However, there are a few issues with your portfolio, which can be easily addressed and will help you achieve your investment objective.
Insurance
At the base of a sound financial plan rests life insurance to protect your dependents against any financial risks. You have selected a Ulip, which is not the best of options for either risk cover or investment. We would suggest you take a pure term policy to cover against you outstanding home loan and also adequate life cover that is at least 5-7 times your annual income which is about Rs 50 lakh. Also, you are at the right age to consider a health insurance plan for yourself as well as your wife. Take a Rs 2 lakh cover each even if your employer offers you’re a group insurance cover.
Fund Portfolio
Through your fund selection you have a diverse allocation across sector, market capitalisation and stocks. Your portfolio has a 90 per cent equity exposure made up of 210 stocks. The top five stocks are ICICI Bank, SBI, Infosys, TCS and Trent with the top three sectors being Finance, Energy and Services.
The portfolio has a large-cap growth style which is because of almost 70 per cent large-cap exposure. You have also made an attempt to spread out fund selection across various categories; which is the right way to build a portfolio for the long-term. But, there are a few issues that you need to address.
In your exuberance to add funds, you have accumulated 11 funds, which is not the way to achieve diversification. Diversification is done to serve a purpose to achieve the desired financial goal. You would have realised by now that investing systematically has done wonders to your investments compared to the few lump sum investments that you have, especially in tax saving funds. And, selecting a good fund is the key. You should be careful when selecting a fund to invest in. You should look at the fund’s long-term performance and track record. An easy way to achieve this is to follow the Value Research fund rating. These star rating are indicative of a fund’s performance over time and in comparison to its peers. So, a 5-star fund will be better than a 3-star rated fund. Likewise, it will be over a period that a fund will lose its star rating from 5 to 3, indicating a continuous fall in performance, which is an exit sign.
While you have tried adopting the core and satellite approach to portfolio construction and have even be successful too some extent, where you have lacked is in allocation of funds towards the core. Your allocation towards the core component comprising large and large- and mid-cap funds should be about 70 per cent. Your allocation currently is about 50 per cent. Increase this by adding another large-cap fund such as DSPBR Top 100 Equity or IDFC Imperial Equity Plan A.
You have selected HDFC MIP Long-term, a conservative balanced fund, which is baffling. When building a portfolio of diversified equity funds, adding a conservative fund does bring in stability, but you are losing the opportunity to allocate more into equity through other fund options. You may consider exiting this fund, despite its performance and track record. Next, you have completed the mandated three-year lock-in with the tax saving funds; and should consider exiting them. You should instead invest the redeemed sums into some of your existing funds.
The satellite component of your portfolio is made up of multi cap funds, mid- and small-cap funds and a special fund such as Reliance Diversified Power. This approach is good and you should continue with it except exiting Reliance Diversified Power. The fund’s performance is impacting your portfolio returns. This was a good fund when you bought it, however, its performance has been on the slide for some time now. Likewise, the performance of Sundaram Select Mid Cap fund is also on the decline. This fund’s select focus on mid caps is playing against its performance and the fund will take a lot to recover lost ground, you will be better of exiting this with DSPBR Micro Cap fund.
Lessons
You need review your portfolio holdings at least once a year. This way you will be able to track the performance of your funds and its progress towards your financial goals. The advantage of SIP investing is legendary, you will be better investing through SIPs than lump sum; the odd tax planning investments in lump sum is understandable as is the case when investing in speciality funds. If you would have been tracking your portfolio; you would have moved from Kotak Opportunities to Quantum Long Term Equity or Templeton India Equity Income funds. Trim your holdings to at best 6-8 fund, which are easy to manage, by existing the mentioned funds, you should be able to accomplish your goal. Lastly, a home loan is an asset creating loan and is good to take, but you need to close the loan as early as possible. Your investments in funds are favourable; do book profits occasionally to make part repayment on your loan every year.
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This article was originally published on February 24, 2011.
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