I am 65 years old with over Rs 5 lakh in equity mutual funds. Since my family is meeting my immediate needs, I am comfortable with 100 per cent equity exposure. However, I have invested in a large number of schemes—27 in all. I feel that I have ended up investing in too many similar schemes. Could you please help me in cleaning up my portfolio?
Ashok Maheshwari
You are right; this is one large and unwieldy portfolio. By having such a large portfolio, you are losing a major reason for investing in mutual funds, which is convenience. And remember, while diversification is a great virtue for equity investors, mutual fund investors have already achieved it through the diversification that the fund manager implements. Large fund portfolios often have so many underlying stocks that they start resembling the broad market. Whatever you gain from the few above average funds, you are likely to lose to the average and below average ones. A large portfolio may thus end up being an index fund in disguise.
Our first step was obviously to put your portfolio through the Check-up on the Value Research Online (valueresearchonline.com). We hope you do use the portfolio tools on our website. There is no better way to keep track of a portfolio and of course it's completely free. Portfolio Check-up uses our database of all the fund's individual portfolios and creates a consolidated list of the underlying holdings in your personal portfolio. It then analyses these consolidated holdings to see patterns in asset types, sector and company exposure, and company size. The Value Research Online Portfolio Manager provides many other facilities besides the portfolio check-up.
In your case, the Portfolio Check-up tells us that while your portfolio is fine in terms of sector and stock diversification, the mid and small-cap exposure is a little too high at 37 per cent. Also, for a pure equity portfolio, the ten per cent in cash and debt is way too much and will just drag down your returns.
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Most of this cash and debt is coming from the three balanced funds that you have. Funds like K Balance, HDFC Prudence and JM Balanced have no role in a portfolio like yours and you must rethink why you own them. Next, you must give some thought to whether you should keep any new funds. A fund's track record is the strongest reason to buy, and new funds, no matter how well-intentioned and how intensively sold during their IPOs, simply don't have a past. An experienced investor must see a fund's performance through different kinds of markets, through good times as well as bad before judging it worthy of investment. Birla Dividend Yield Plus, DSPML Top 100 Equity, Sundaram Select Focus, Sundaram Midcap and HSBC Equity should exit your portfolio on these grounds. Of course, given the recent bull run, you are likely to be holding good short-term capital gains in these so you should consider your tax situation before taking a final decision on these funds.
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Now let us see if there is possible duplication. Alliance Basic Industries and Prudential ICICI Power have both been peas of the same pod. Both of them are theme funds that invest in core sectors of the economy and both are undergoing some changes. While Alliance's high profile fund manager, Samir Arora has left under a cloud, Prudential ICICI Power has recently expanded its investment mandate to include all sectors and has also gained a fund manager with a good track record (Chandresh Nigam) from Zurich Mutual Fund. We would thus recommend staying with Prudential ICICI Power.
The 18 remaining funds are basically diversified and a portfolio can be built around them. Our selection is reflected in the table. It consists of a core of large cap funds, which have a strong history of performance. To this, are added a few mid-cap schemes and some aggressive funds that should give your portfolio a boost. With this portfolio your cash and debt allocation is down to less than 3 per cent. Mid and small-caps now form a fourth of the portfolio. The stock and sector diversification that were present in your previous portfolio also remain the same and you also have the added bonus of ease of management.
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This article was originally published on November 13, 2003.
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