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Increase Equity Allocation

Make equity the core of your portfolio to build wealth over the long-term…

My husband is 30, I am 28, and we have a one-year old son. With both of us having worked abroad for the past few years, we have been able to accumulate some savings. We expect to bring back Rs15 lakh divested from our employer’s 401K plan later this year. Now that we are back in India, we plan to live in our own home that is fully paid for. In his new job in India, my husband’s take-home salary will be Rs90,000 per month. I do not plan to work for the next few years. We estimate that every month we will be able to invest approximately Rs40,000. Of this, we plan to invest Rs25,000 through the SIP route and keep the balance in cash, fixed deposits, or liquid funds.We have endowment insurance policies started in our early twenties. Additionally, my husband’s employer will cover him under a term plan and also provide medical insurance cover for our family.

Our investment style has been rather haphazard so far. We would like to know what steps we need to take to rebalance our portfolio. Is our choice of mutual funds correct?
Your investment decisions appear haphazard both in the selection of funds and stocks. For the sake of simplicity we have compartmentalised your portfolio into funds and stocks. Since you have a greater amount invested in funds we shall make them the mainstay of your investment strategy.
Funds:You have invested in very good funds like HDFC Equity and Reliance Regular Savings Equity. But you have also taken on board below-average performers like Sundaram S.M.I.L.E. and untested funds like Principal Emerging Bluechip or Reliance Small Cap. Your selections are not all bad, neither are they all good. You can improve your portfolio by opting for time-tested funds and by allowing our ratings to be your guide.
We disapprove of the way you have accumulated so many funds in such a short time frame. More importantly, as you have yourself mentioned, most of these are one-time investments. You should have taken advantage of rupee-cost averaging by investing in your mutual fund portfolio via SIPs. The result of investing in lump sum is that so far you have earned almost no returns from this portfolio.
Stocks: Your stocks portfolio has given an absolute return of 15 per cent which is a decent gain. Considering that the market has tanked by 10 per cent since November 2010, this is not a bad start. As you might have realised yourself, Infosys is the mainstay of your stock portfolio. It comprises 29.08 per cent of your portfolio. Relying too much on a single stock increases downside risk. By the way, the funds you have chosen have also bet heavily on this stock.
Since the stock portfolio is meant to provide a kicker to your portfolio return, having a very small exposure to stocks does not make sense. In your portfolio you have got a few stocks that have very negligible impact on the overall portfolio. Try to consolidate your stocks portfolio: only hold onto stocks that you are highly convinced about and which have not underperformed the market for long.
Asset allocation: Your portfolio has a heavy tilt towards debt. The income and obligation profile that you have provided doesn’t require you to allocate such a large proportion of your investments in debt. Your cash holdings are adequate and will enable you to tide over small emergencies.
Pare your debt holdings like fixed deposits and debt funds and allocate more to equity funds. Currently the debt-equity ratio of your portfolio is 53:41. Re-orient your portfolio so that the allocation settles at around 73 per cent in equities and 20 per cent in debt. Try to maintain it at this level by rebalancing (either by selling equities and buying more debt or the other way round) periodically.

What advice would you give us for future investments — the monthly surplus of Rs40,000 as well as the lump sum Rs15 lakh we expect to bring back later this year and the fixed deposits maturing next year?
You have made balanced funds the mainstay of your fund portfolio. We think this is the right way to go. Currently they corner 27.31 per cent of the fund portfolio. The rest of the portfolio is dominated by Mid- & Small-cap funds (30 per cent) and Multi-cap funds (19.25 per cent). Our suggestion would be that you hike your balanced fund allocation to 60 per cent and keep the rest in Multi-cap funds.
As for the debt portion, invest in debt funds rather than in bank fixed deposits. They are much easier to manage than fixed deposits when it comes to rebalancing.
First, invest the amount that will come to you on maturity of fixed deposits and from 401K in a debt fund, then do a systematic transfer into equity funds.
You already have almost six months of your salary in cash. Increasing it further by allocating Rs15,000 every month would therefore be excessive. Rather divert this to your fund and stock portfolio.

Are we on track to achieve our goals?
Your current investment and the future SIPs that you plan to initiate are more than adequate for meeting the goals that you have set. Investment of Rs25,000 every month for the next 27 years at the rate of 10 per cent will give you a corpus of Rs5.6 crore (after paying for your son’s education), enough to see you through your years of retirement.

Portfolio Highlights
Skewed towards debt, equity:debt ratio = 41:53
Fund Portfolio
• Mid- & small-cap oriented exposure is 55.48 per cent
• Out of 15 funds, two are 2-star rated and four are unrated funds
• Mode of investment has been lump sum
• Fairly diversified MF portfolio, with the underlying stock portfolio diversified across 329 stocks
Stock Portfolio
• Dominance of one stock: Infosys
• Biased towards blue chip companies
• In as many as five stocks, exposure is less than 1 per cent
• Top five stocks corner 52 per cent of the portfolio
• Nine stocks in the portfolio have gained over 15 per cent, while 11 are in the red

Suggested Portfolio
Birla Sun Life 95 DSPBR Equity Birla Sun Life Mid Cap
DSPBR Balanced HDFC Equity ICICI Prudential Discovery
HDFC Prudence Reliance Regular Savings Equity IDFC Premier Equity
 UTI Dividend Yield