I will retire after one year. I have a flat and a car. My total investments are:
Mutual Funds: 15.12%, Shares: 10%, FD & savings: 13%, Long-term fixed savings (PF, PPF, gratuity etc): 61%, US-64: 3.57%, Infrastructure bonds: 2%. My mutual fund investments are spread as shown in the table. Please advise me on the percentage of mutual funds that my overall portfolio should contain and if I have the right funds.
Jayanta Ghoshal
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With more than half of your savings in income yielding assets, your retirement portfolio seem to be in a good shape already. But in order to bring liquidity and enhance returns, we recommend minor changes in the composition of few asset classes.
Going by the current allocation, long-term fixed saving instruments constitute around 61 per cent of your total savings. This also means that a large portion of your savings is tied up in long-term investments like provident fund, PPF and gratuity and it may not be available for use immediately. In our calculations, we assume that you have adequate financial resources to meet your day-to-day needs.
Bank fixed deposits and savings constitute 13 per cent of your investments. The sharp decline in interest rates has also resulted into bank fixed deposits rates falling. Though you would have locked in at higher interest rates, today the FD rates hover around 5.5-6 per cent for a three-year period. With a considerable percentage of your investments already in fixed income yielding assets, the rest of your portfolio can be put to use to generate higher returns. Therefore, we recommend that allocation to bank fixed deposits can come down to about 8 per cent and you increase your allocation in mutual funds to about 20 per cent of your portfolio.
Again within your mutual fund portfolio, 60 per cent is invested in debt and 40 per cent is in equities. Even here, the allocation can be altered in favour of equity funds, which can boost overall returns. Though you haven't disclosed your direct investment in shares, which constitute 10 per cent, we hope that it consists of solid companies, which are unlikely to throw nasty surprises during bad times. Your mutual fund portfolio needs some overhauling as it appears to be thinly spread out across funds. On the equity side, you own five diversified equity funds-two balanced funds and three technology funds. On the debt side, you own a cash fund and a long-term gilt fund.
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By setting up your portfolio on valueresearchonline.com, we found that across all your equity funds, technology sector comprises 35 per cent. Therefore, the first step is to get rid of all the tech flab by exiting out of the three technology funds you hold. This isn't to say that these funds' performance is bad, but by virtue of being pure technology players, they lend higher risk to your investments. And if you hold adequate diversified equity funds, you would automatically have some tech exposure. Among diversified equity funds-HDFC Top 200, Prudential ICICI Growth and Birla Advantage have been average performers. Alliance Basic Industries, an old economy specific fund, and Franklin India Prima, a mid-cap fund, are among top performers across time periods. Investments in these two funds can be kept intact. As for the three diversified equity funds, it is advisable that all investments are consolidated in a single equity fund-which is among the top performers. While doing so please remember that you may incur capital gains tax.
The two balanced funds that you hold-Prudential ICICI Balanced and Birla Balance-are also average performers in their category. Moreover, as you hold the diversified equity funds of both the fund houses, it results into duplication, as both these balanced funds largely replicate the stock and sector composition of their respective equity funds.
With a heavy exposure in a cash fund and a small exposure to a gilt fund, your debt fund portfolio is attuned to meet short-term needs. Cash funds are ideally suited for investors who want to park their surpluses for a short period, say a week or a month. While capital preservation and quick redemption are the key benefits, one has to compromise on returns in cash funds. So, if the money invested here isn't for the short-term, it is advisable to switch over to an income fund, which can perhaps generate superior returns. Gilt funds, on the other hand, are the riskiest investments among all kind of debt funds and FT India Gilt Fund is the most volatile gilt fund in its category. One way to minimise the risk of investing in debt funds is to switch from a gilt fund to a short-term debt fund. Compared to income and gilt funds, short-term debt funds are less vulnerable to changes in interest rates. Thus your overall portfolio composition will look as it appears in "New Portfolio".
This article was originally published on January 12, 2004.
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