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Review, Refine and Rebalance

Plan and build a portfolio with funds that have a track record and history and analyse its performance with time

I am 30 years old and have been investing in mutual funds for the past three years. I also have two funds in which I have SIPs for Rs 8,000 and also have two Ulips. I have a medical insurance from my employer for Rs 1 lakh. I am investing for my retirement and can invest additional Rs 7,000 a month. I need advice on my investments.
- Bhawna Sharma

You started investing when you were 27 and in your hurry to maximize your investments you have built a portfolio of 21 funds. Your investments are to create a sizeable retirement nest egg, which can be achieved with a few changes without much difficulty.

Insurance
At Value Research, we believe that you should have adequate life insurance, which should not be mixed with investments. You have two unit-linked insurance policy (Ulip) for which you are paying an annual premium of Rs 30,000. If you are already into this for a few years, evaluate the paid up value of the policy before considering terminating it. Mixing insurance and investments is like mixing the salad and the dessert in a buffet.
You need to evaluate your life insurance needs depending on the financial dependents and liabilities that you have and look for a low-cost term cover. These are pure risk insurance covers that are taken to mitigate financial risks and do not mix investments. Pure term covers are the cheapest form of life covers that do not have any investment component. Look for the one that works the best at your age.
It is also a good time for you to consider health insurance irrespective of your employer offering it. You can start with a Rs 2 lakh cover and increase it gradually as you age.

Goal Setting
At 30, you have time on your side and many years to go for your retirement. It may be a good point for you to list your other financial goals such as buying a house, a car or planning for holidays. This way, you will ear-mark a year when you will need money for the goal as well as track your investments towards that goal.

Investment
This is a matter of concern. Your investments seem to follow an erratic path and are not regular. You also do not seem to be tracking your investment for timely changes. You should invest regularly and with a clear plan to achieve your financial goals. This way, you will be detached from market movements and average your acquisition irrespective of market cycles. You can observe the gains from regular SIP investments that you have in the two funds where you have been investing regularly compared to the rest, which have been lump sum investments.


Existing Portfolio
Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
Birla Sun Life Index-G Large Cap *** 0.96 11.36
DSPBR T.I.G.E.R. Reg-G Infrastructure **** -3.86 11.66
DSPBR Top 100 Eqt Reg-G Large Cap **** 8.01 17.13
HDFC Cash Mgmt Treasury Advantage Retail-G Debt: Ultra Short Term *** 6.52 6.94
HDFC Equity-G Multi Cap ***** 12.76 17.62
HDFC Infrastructure-G Infrastructure Not Rated - -
HDFC Long-term Equity-G Multi Cap *** 5.48 8.99
HDFC LT Advantage-G Tax Planning **** 6.11 10.5
HDFC Top 200-G Large & Mid Cap ***** 11.37 17.98
ICICI Pru Tax Plan-G Tax Planning **** 8.92 11.41
JP Morgan India Smaller Companies-G Mid & Small Cap ** -5.75 -
Kotak 50-G Large Cap ** 0.42 12.51
Magnum Taxgain-G Tax Planning *** -0.45 11.12
Principal Personal Tax Saver Tax Planning ** -3.74 10.96
Principal Tax Savings Tax Planning * -9.52 5.56
Reliance Growth-G Mid & Small Cap *** 4.97 15.9
Reliance Natural Resources Retail-G Equity: Others Not Rated 1.09 -
SBI Bluechip-G Large & Mid Cap *** -0.05 6.28
Sundaram Energy Opportunities-G Equity: Others Not Rated -5.01 -
Tata Infrastructure-G Infrastructure **** -4.46 12.06
UTI Leadership Equity-G Large & Mid Cap ** -1.75 7.94
Returns as on March 1, 2011 Ratings as on February 28, 2011

Some of your fund investments are in NFOs. Remember, there is a huge uncertainty with these investments as they do not have any track record or past performance. Moreover, there are several overlaps in the funds that you have selected. There are five tax saving funds and few sector and thematic funds besides a short-term debt fund which does not justify a presence.



Suggested Portfolio
Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
AIG World Gold-G Equity: International Funds Not Rated - -
Birla Sun Life Dynamic Bond Ret-G Debt: Income **** 8.76 8.61
DSPBR Micro Cap Reg-G Mid & Small Cap ***** 5.04 -
Fidelity Equity-G Large & Mid Cap **** 8.03 16.34
HDFC Equity-G Multi Cap ***** 12.76 17.62
IDFC Premier Equity Plan A-G Mid & Small Cap **** 8.66 21.62
Returns as on March 1, 2011 Ratings as on February 28, 2011

Having too many funds is not the best way to achieve portfolio diversification and in some ways idea duplication actually reduces your chance of superior performance. There is of course the difficulty to manage such a wide array of funds, which is evident by your continuing investments in some funds that you should have long exited.

The best way to long-term wealth creation is through investments in equity, and mutual funds offer the medium to achieve this over the long-term, especially when investments are regular and systematic. Time is on your side and the right mix of equity funds will help you generate superior returns. You should consider a portfolio with 90 per cent equity exposure as suggested in the recommended portfolio.

Consolidating your portfolio
You need to consolidate your fund holdings and we suggest you reduce your fund holding from 21 to not more than 7-8. You can retain some of the tax saving funds that are yet to finish their 3-year lock-in to take advantage of the tax benefits. Gradually phase out your existing portfolio barring a few funds such as HDFC Top 200, DSPBR Top 100 Equity and DSPBR T.I.G.E.R. from your existing selection of funds and initiate systematic withdrawal from the rest to invest in the new funds. Have equal SIPs across the five suggested funds.

Review and Rebalancing
By being regular with your investments you should be able to achieve your desired financial goal with little difficulty and you should consider using the additional investment that you have in mind into the suggested portfolio. The lesson for you from these investments is that mutual fund investing is not a one time exercise; to get the most out of your investments you need to track them and evaluate the fund's performance at least once a year. This way you can evaluate your portfolio's progress and its journey towards achieving your financial goal. This exercise also gives you the flexibility to make changes to your portfolio by exiting non performers and investing in better faring funds and rebalance them.