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Negotiating Risk

It can often be wise to invest via lump sum, rather than through SIPs, in risky sector funds…

I started investing in five SIPs in January this year in Reliance Regular Saving Equity, HDFC Top 200, Reliance Banking, Reliance Pharma and Sundaram Select Mid cap fund for Rs 2,000 each. I am investing with a five year time frame; are my investments good?- Pankaj Detani

Fund Scheme  Category  Ratings  3-yrs ret (%)  5- yrs ret (%)
HDFC Top 200 Large & Mid Cap ***** 20.67 21
Reliance Banking Equity: Banking Not Rated 30.9 34.21
Reliance Pharma Equity: Pharma Not Rated 38.1 31.45
Reliance Regular Saving Equity Multi Cap **** 17.45 23.56
Sundaram Select Midcap Mid & Small Cap **** 22.03 18.23
Return as on July 22, 2011, Ranking as on June, 2011

You have selected good funds. However, there are a few issues with your portfolio. The portfolio lacks focus and is made of risky funds. The investments in two sector funds are risky because of the thin investment mandate these funds follow. For instance a pharma fund typically invests in securities of companies belonging to pharmaceutical sector and a banking sector fund invests in stocks of banks and financial services companies. Make sure you understand the risk with these funds, and also the fact that exiting these funds is as crucial as entering them and that it may be wise to invest in lump sum in such funds rather than systematically. Sector fund allocation should not be high and one should look at not more than 10 per cent allocation to these funds.
What you need is a diversification in style and not number for your portfolio. You can do so by building 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 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.

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