VR Logo

Exit Stocks, Enter Funds

Invest in mutual funds if researching stocks & keeping track of them is burdensome…

I have received stocks worth Rs 1 crore from my father. He had been actively trading and investing in stocks for the past 35 years. I am not that good at stock investing and I don't know exactly what to do with them. But I do have a long-term investment horizon. Over 70 per cent of these stocks were bought over a year ago. What should I do?
- D Kumar

You are lucky that your father has handed over a portfolio valued at a little over a crore currently, which is doing well. However, such a large and valuable portfolio also comes with attendant responsibilities. That you have listed your financial goals and have a mutual-fund portfolio that rides on systematic investment plans (SIPs) reflects your sound temperament towards investing. That you also have a house of your own and do not service any loan indicates your prudent handling of finances.

Insurance: By opting for a term plan you have made the right selection. The Rs 27 lakh cover is a good start and is about 10 times your current annual household expenses. If you take on any additional liability, consider increasing this cover.
You have Rs 4 lakh worth of medical insurance that covers you and your family members. However, an employer-provided insurance cover lasts only as long as you are employed. Urgently consider supplementing this cover with one purchased by you.
PPF: You have PF deducted from your salary. If the debt component of your portfolio is high, reduce your contribution to PPF.
Pension Plan: You don't need a pension plan. Check its fund value and exit costs and terminate the plan if this does not cause losses.

Financial Goals
That you have been able to quantify your goals and are also aware of the time frame within which you have to achieve them are positives. Now work towards achieving them.
With the Rs13,000 investible surplus that you have, it will not be easy to achieve your financial goals within the time frame you have stated, unless you start dipping into the stock portfolio that your father has given you. Temper some of your goals: postpone your retirement and your plan of buying a bigger house. Instead focus on goals such as saving for your child's education.
At 32, however, you have time on your hand, and your income will increase. Continue investing aggressively in equities as it is one asset class that has the potential to help you achieve your financial goals over the long term.



Financial goals
        Monthly investments  
 Cost (Rs) Years to go @12% @15%
First child's education 20 lakh 9 10,300 8,750
Second child's education 20 lakh 11 7,300 6,000
Retirement and other future expenses 5 crore 19 57,200 38,700


Current portfolio
Schemes  Category  Rating  3-yrs ret(%)  5-yrs ret(%)
DSPBR Equity Multi Cap **** 15.47 16.16
HDFC Equity Multi Cap ***** 20.89 16.94
HDFC Top 200 Large & Mid Cap ***** 18.95 16.97
ICICI Prudential Fusion Mid & Small Cap Not rated 6.26 6.55
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Reliance Regular Savings Equity Multi Cap **** 13.47 20.5
Returns as on April 6, 2011 Ratings as on March 31, 2011


Suggested portfolio
Schemes  Category  Rating  3-yrs ret(%)  5-yrs ret(%)
Fidelity Equity Large & Mid Cap ***** 16.34 14.7
HDFC Equity Multi Cap ***** 20.89 16.94
DSPBR Micro Cap Mid & Small Cap **** 14.66 
AIG World Gold International Not Rated  
BSL Dynamic Bond Ret  Income **** 8.92 8.79
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Returns as on April 6, 2011 Ratings as on March 31, 2011

Investments
You have a diversified stock portfolio of 71 scrips spanning market capitalisations and sectors. Managing such a large portfolio will require you to review and watch their performance closely. On the other hand, mutual funds require less frequent review, once a few good funds have been selected and a portfolio built around them. Your temperament suggests you would be better off having the larger portion of your equity investments in equity mutual funds rather than in stocks.
Do not exit all the stocks you own; hold on to some of them, especially the ones that are part of a large representative index such as BSE 100. These are mostly companies with good financials and fundamentals. They are actively traded and both institutional and retail investors invest in them. By staying invested in these stocks, you can expect the value of your holdings to grow further, as well as earn dividends and bonuses from them, as has been the case in the past. You may exit the remaining stocks in a phased manner by booking profits and without attracting capital gains tax.

Mutual Funds
Your current selection of six mutual funds is not bad, but no thought seems to have gone into making a portfolio out of them. Having three multi-cap funds and two mid- and small-cap funds is diversification in terms of numbers but not in terms of style or market capitalisation. What you need is a diversified portfolio that is easy to manage and has the potential to help you achieve your long-term financial goals. Diversification reduces the volatility within a portfolio.
We have suggested an aggressive portfolio that has 90 per cent equity exposure and have retained two of your existing SIP investments in it. The higher equity allocation and regular investments in this portfolio should help you achieve your financial goals.
You can also adopt a core and satellite portfolio strategy. The core portfolio will comprise funds that need low maintenance, while the satellite portfolio will have to be actively tracked. With this dual strategy you can take advantage of market opportunities without putting your complete portfolio at risk. The core comprises large-cap and large- and mid-cap funds. The satellite allocation comprises multi-cap funds, mid- and small-cap funds, sector funds and even thematic funds.
As the core portfolio comprises funds that are not prone to violent swings, it will cushion your portfolio against market swings while providing steady returns. The satellite portfolio comprises high alpha-generating funds, which will give a fillip to returns. The main advantage of this approach is that it is flexible and can be modified according to the investor's risk appetite.
You have also parked some of your savings in fixed deposits. Transfer them into a liquid fund, which is likely to give superior returns while also being more tax efficient.