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Diversify Properly

Investing in many funds across different market caps does not account for proper diversification…

I am 28, my wife is 25 and we have a five year old daughter and one year old son. I have SIP investments in HDFC Top 200, HDFC Equity, Reliance Vision, BSL Equity, Franklin India Bluechip, Reliance Regular Savings Equity and Reliance Growth. I am investing for the long-term; is this right approach?
- Rajan K

Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
HDFC Equity Multi Cap ***** 18.76 20.53
HDFC Top 200 Large & Mid Cap ***** 16.08 20.53
Reliance Vision Large & Mid Cap *** 9.52 15.33
BSL Equity Multi Cap ** 6.28 15.19
Franklin India Bluechip Large Cap **** 13.52 17.4
Reliance Regular Savings Equity Multi Cap **** 12.12 23.58
Reliance Growth Mid & Small Cap **** 9.28 18.83
Returns as on June 16 , 2011 Ratings as on May 31, 2011

A portfolio made of seven funds across market-capitalisation does not lead to diversification. Though you have made some good choice of funds, there are a few that would be best exited. For instance, three multi cap funds and two large- and mid-cap funds only add to overlaps.

However, you need to have a clear goal that you are looking to save for instead of investing randomly across so many funds. This way, when tracking your fund holdings, you will be able to ascertain its performance and where it is headed.

Build a portfolio that is based on a core and satellite approach. This approach will provide the necessary stability and growth for long-term wealth creation. Ideally, you should look at investing 70-80 per cent in core funds and the remaining in satellite funds. You can have 2-3 funds as core holdings comprising large-cap and large- and mid-cap funds, with the satellite component with mid- and small-cap funds and multi-cap funds to achieve long-term wealth appreciation. This way, the investments have the ability to absorb shocks as well as have the potential to earn higher returns over various market cycles.

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