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Tuning a Long-term Portfolio

With an investment goal of long-term wealth creation and an above-average risk profile, my portfolio consists of several equity funds. Do I need to fine-tune it?

I am a 35-year-old public sector employee with one son and without any special financial commitments. With my inherited house, PF, contributory pension scheme and term cover, I consider myself to have above-average risk tolerance. My investment goal is long-term wealth creation. My fund portfolio is given alongside. Do you think I need to make any changes to that would further align my portfolio to my investment goals?
M. Prasad

Our compliments on being one of that minority of investors which has clearly defined and well-articulated investment goals. As always, our first step in analysing your portfolio was to give it a checkup at valueresearchonline.com. On the whole your portfolio looks fine. You have a good collection of funds, which have been performing well in recent years.

There's one major issue with your portfolio: we can't quite figure out what HDFC Prudence is doing there. This is an excellent balanced fund, which is suitable for conservative investors who want an equity exposure along with a stable chunk of debt. It is out of place in a portfolio that targets 'wealth creation' with an 'above average risk-tolerance'.

M. Prasad's Portfolio
Fund Name  Percentage
HDFC Equity 10.60%
HDFC Prudence 18.50%
Reliance Vision 22.00%
Reliance Growth  6.00%
Franklin India Bluechip  7.50%
Franklin India Prima  8.50%
Franklin India Prima Plus  4.50%
Alliance Basic Industries  18.00%

In order to make the portfolio more manageable we also suggest doing away with Alliance Equity and Reliance Growth. Alliance Equity has been a laggard in recent years and now the portfolio manager is also changing. Reliance Growth has been performing well recently. However, much of this has come through a portfolio of smaller and lesser-known names. Your current exposure also does not give these funds a serious role in your portfolio.

The core of your portfolio should be made up of Franklin Bluechip (30 per cent) and HDFC Equity (30 per cent). Both having been in the top quartile for many years. Bluechip is a pure large cap fund, which is well diversified. HDFC Equity is also large cap though it does take some mid-cap exposure. The portfolio is more focussed. The fund usually holds 15 to 20 stocks and moves quickly between sectors. The two complement each other.

A ten per cent exposure to Franklin Prima Plus allows another good fund manager to play a role in your portfolio. The fund also gives you some mid-cap exposure as it invests in both large as well as mid caps. At the core of this mid-cap component is Franklin Prima (10 per cent). This fund is volatile, but it does deliver the goods. Its portfolio quality is also better as it has well known mid-cap names as its mainstay. Reliance Vision brings up the rear of the mid-cap trio. Though largely a denizen of the second quartile, this has blossomed recently. With less well-known names a 10 per cent exposure to this fund can add a kicker to the portfolio. We lean towards retaining Alliance Basic despite of the fund manager change because it gives focussed exposure to core sector companies. Lower exposure at 10 per cent will reduce risk. But this call will have to be reviewed when a new fund manager comes in.

Rank  Percentage(%)
Giant 33.46
Large Cap 24.72
Mid Cap 34.61
Small Cap 5.37
Not Classified 1.84
Rank  Percentage(%)
Giant 43.19
Large Cap 28.95
Mid Cap 24.22
Small Cap 3.07

While implementing these changes the tax implications will also have to be considered. It appears that you've held these funds for more than a year and should only have to pay long-term capital gains tax. In case there is any short-term component, you could wait till a year is completed before realigning the portfolio.

This portfolio should keep your money in good shape, but you will need to review and realign it once a year. As you are looking for long-term growth you can stick with a 100 per cent exposure to equity. As your retirement nears, start moving a part of the portfolio towards debt. By the time you retire this can be converted to a debt portfolio with a 20 per cent equity component.