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Surviving Equity Bumps

I am 58 years old, recently, I made an entry into equity oriented mutual funds. In 30 days, their value has tanked. I do not want a repeat of February 2000. Please tell me what should I do?

I am 58 years old and took my retirement 4 years back and presently I am leading a sedentary life. Till June end, all my investments were in Relief Bonds, PPF and other 100% secured investments. Between last week of June 2002 and 1st week of July 2002, I made an entry into equity oriented Mutual Funds, using the maturity proceeds of Relief Bonds, as under:

1. Reliance Growth Fund (G) Rs.1,50,000/- @Rs.30.42 2. Reliance Growth Fund (G) Rs.75,000/- @Rs.31.68 3. Reliance Growth Fund (G) Rs.2,00,000/- @Rs.32.13 4. Reliance Vision Fund (G) Rs.3,00,000/- @Rs.26.25 5. Reliance Vision Fund (G) Rs.75000/- @Rs.28.03 6. Pioneer Blue Chip (G) Rs.2,00,000/- @Rs.23.21 7. HDFC growth Fund (G) Rs.75000/- @Rs.8.998 8. Templeton India Growth (G) Rs.75000/- @Rs.13.38

In February 2000, I entered equity funds and booked heavy losses and came out. I do not buy and sell shares as I do not understand them. Now the values of my investments have tanked in just 30 days after my entry in all funds. I am worried and I do not want a repeat of February 2000.

With regard to each one of my Funds please tell me what I should do with defined time frames. I have other savings and these investments form 10% of all my liquid assets.

S.Seetharaman on e-mail.

It is disappointing to lose soon after you invested and your anxiety is understandable. But a 10% fall in the value of an equity fund in a month is not unusual. So don't let this anxiety prompt you to act in haste. Here's a suggested guideline and action plan to manage your portfolio and the financial anxiety.

To allocate 10 per cent of investment into equities is a good idea. Especially now, when the fixed income yields are crumbling. And with a long-term orientation, equity can help you beat inflation and enhance your total return. With exposure just being 10% of your total investments, you are better placed to ride the equity downturn. In all probability, few years from now you can laugh at this 1-month notional loss.

I setup your portfolio at valueresearchonline.com to run a portfolio checkup. The summary is that your total investment of Rs. 11.50 lakhs is worth Rs. 10.54 lakhs, an unrealised loss of Rs. 95,853.

And the table contains has the portfolio characteristics of the funds you own.
% in your Large Mid Small Portfolio Reliance Growth 36.52 45 34 18 Reliance Vision 32.35 10 52 30 Pioneer ITI Bluechip 17.84 99 1 -- Templeton Growth 6.66 75 25 -- HDFC Growth 6.63 69 28 3

Based on the underlying portfolio of the funds, you total investment's 51% is in large cap stocks, 31% in mid-cap stocks and 15% in small-cap stocks. In our view, the underlying allocation to mid and small-cap stocks is way too high. As large cap stocks tend to be more stable than mid– and small–cap stocks and enjoy superior liquidity. Large cap stocks should form the core of an equity portfolio. As a thumb rule, we suggest a 70% allocation to large cap stocks. This can be achieved by reducing your allocation to Reliance Growth and Reliance Income, which together account for 70% of your portfolio and tilted to mid- and small-cap stocks. And the realisation should be deployed in the other three funds you own.

After building a well-diversified portfolio of equity fund, your investments deserve time to grow. And true diversification means a portfolio of spread over stocks of various sectors, capitalisation and style as well. Equities may pay off big, but not quickly. An attempt to time the market with frequent entry and exits may work sometimes. But the anxiety generally leads you to – Buy high and sell low. And a staggered investment over a period will greatly help reduce anxiety.

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