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Make a Fun Allocation

Investing directly in stocks calls for discipline, flair and the ability to understand the risks involved to be successful…

I am 45, married and have two children. I have been an avid reader of your magazine and need your help in giving my portfolio some direction, especially the mutual fund portfolio. My portfolio of stocks and mutual funds has a 55 per cent equity allocation with the remaining in EPF, PPF, fixed deposit, emergency fund and savings. I am waiting for an appropriate time to exit the infrastructure and tax funds from my portfolio. I am adequately insured through term plans, health and home insurance and have no liabilities. I have exited Fidelity long term equity which I had accumulated over the past 6-7 years, Can I reinvest this in Quantum Equity fund? What other funds will make sense given my portfolio to maximise my gains? All my financial goals will be achieved according to a financial planner. – Pradeep Khanna

The dice is heavily loaded in favour of investing in mutual funds over direct equity investing. Mutual funds offer diversification, are professionally managed, require less knowledge and time from the investor, except for the due diligence involved in fund selection and monitoring it periodically. On the other hand, equity investing is a completely different ball game. Investors in direct equity need some flair, discipline, understanding of the economy and time to analyse the shares they invest in, which is easier said than done.

However, if one has the risk taking ability and flair to invest in equity directly; one must. To get started, one could allocate 10 per cent of their investments in the form of a fun allocation to direct equity with clear risk-return pay off. The fun allocation should have set targets to profit and stop loss. For instance, if the target of 15 per cent appreciation is achieved, the stock should be exited or the allocation maintained with partial exit. Likewise, there should be set stop loss triggers and one should exit the stock at such points.

You come across as a prudent investor, especially when it comes to your ability to address your essential financial needs. You are adequately insured, have substantial health insurance for yourself and your family, have sufficient emergency funds, savings and have clearly spelt out financial goals. The assessment by the financial planner that your financial goals will be achieved is a big plus for you to continue investing. Moreover, without any liabilities and at least another 15 years to go for your retirement you have a lot going with your finances that can only improve your financial future.

Financial report
At your age you could increase your equity allocation from the current 55 per cent that you mention. You should consider increasing your exposure to equity given your ability to take higher risks and the gains from equity that you have experienced so far.
• Your investment allocation is well-diversified across 244 stocks and is a blend of large-cap growth and value
• You have a moderately aggressive mutual fund portfolio, but there are overlaps with three mid- and small-cap funds and three large- and mid-cap funds in them. The infrastructure fund has not worked and you should consider exiting it and cut your losses
• The presence of pharma fund is to balance the lack of adequate pharma allocation which is a good strategy to adopt
• The presence of HDFC Liquid is owing to your exit from the Fidelity fund, which is understandable given the change in the management of the fund
• Investing the proceeds from the Fidelity fund in Quantum Long Term Equity is undesirable. You can instead consider investing in the existing schemes in your portfolio. You can make this investment systematically instead of lump sum

Though well-diversified, your stock investments lack clarity of purpose. The near 75 per cent allocation to mid- and small-cap stocks is risky and calls for regular monitoring; if you have the time for it, maintain the allocation. Moreover, having 45 stocks does not necessarily amount to diversification.
• The current gain from your equity investment is 5.35 per cent compared to 11.59 per cent gains from the mutual fund allocation. You would realise the benefits of investing in mutual funds over direct equity
• You should also consider reducing your direct equity holding to a manageable number with clear exit strategy with these investments. Use the mid- and small-cap equity investments as an opportunity, with mutual fund investments and large-cap bluechip stocks such as SAIL, SBI, ICICI among others for long-term wealth creation
• Your portfolio lacks international flavour, which you could consider by investing in the Motilal Oswal MOSt Shares NASDAQ-100 ETF, which is in-line with your fondness for diversification and aggression