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Diversifying In Style

Investing in mutual funds from the same fund company reduces the style diversification of your portfolio…

I have a lump sum of Rs 5 lakh which I would like to invest in HDFC Equity, HDFC Prudence and HDFC MIP Long Term. Which liquid fund should I invest the lump sum in to initiate SIPs and are the funds selected good for a five year time frame?
- Sivasankar Elambooranan

Though you have selected highly rated funds which have proven track record and performance history, collectively they lack diversification and focus. If you are conservative an investor, the presence of two hybrid funds makes sense. However, you also have HDFC Equity which belongs to the risky multi cap category. Moreover, having all funds from the same asset management reduces style in investments. You should consider building a portfolio based on the core and satellite approach to achieve diversification as well as growth in the long run. By adopting this approach the portfolio will have the necessary stability and growth for long-term wealth creation.

Fund Scheme  Category  Rating  3-yrs ret (%)  5- yrs ret (%)
HDFC Equity Multi Cap ***** 25.35 19.75
HDFC Prudence Hybrid: Equity-oriented ***** 24.73 19.58
HDFC MIP Long-term Hybrid: Debt-oriented Conservative ***** 14.77 11.76
Return as on July11, 2011, Rating as on June, 2011

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 sector 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.

With bank deposit rates offering good returns, you can consider holding the lump sum in a sweep-in account with your bank and initiate SIPs from that as most of the good performing liquid funds have a much higher entry barrier than the Rs 5 lakh you have to invest. Consider investing in large-cap funds such as DSP BlackRock Top 100 Equity or Franklin India Bluechip and in large- and mid-cap funds such as HDFC Top 200 or ICICI Prudential Dynamic fund.

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