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Out of Tune Investment

I have investments in Prudential ICICI Dynamic, IL&FS Dynamic and Birla Midcap funds. Considering my risk profile as moderate and for a year of investment period, does my portfolio looks healthy?

I am new to mutual fund investment. I made an investment of Rs 20,000 each in Prudential ICICI Dynamic, IL&FS Dynamic and Birla Midcap in December 2003. Considering my risk profile as moderate and for a year of investment period, does my portfolio looks healthy? If I were to invest in a fund on a monthly basis, is this the right time and which are the funds I should invest in?
Uday Kanth

We have a situation here. You are new to funds and this has resulted in a portfolio, which is out of tune with your moderate risk profile.

None of the schemes you have invested in have a significant history of performance and so no conclusions can be drawn on how they will behave in future. Nonetheless, these funds are some of the most aggressive by design. IL&FS Dynamic Fund can chose to concentrate on specific sectors, have a much higher mid-cap allocation and move rapidly into cash if it feels that the situation so desires. If things go right, the rewards could be significant but if mishaps occur the losses could be unbearable.

Birla Midcap is a pure mid-cap fund. Mid-caps by definition are volatile and so a rocky ride is likely with this scheme. Of this aggressive lot, Prudential ICICI Dynamic is the most "passive". But this is on a relative basis only. The fund is predominantly large-cap and diversified but can move the entire portfolio into debt and this opens up the fund to the risks of timing.

The combination of these schemes thus mutates into a portfolio with high risks. First of all the portfolio is fully skewed towards equities. There is no debt component, which can lend stability. For a moderate risk portfolio we would recommend an equity allocation of 40 to 65 per cent. At the same time more than half the portfolio is invested in mid-cap stocks, while for most portfolios we would suggest a mid-cap allocation of 20 to 30 per cent. Sector and stock allocation are, however, okay.

We would suggest that you take a look at our star ratings to pick up some solid balanced funds. These would provide the desired allocation between equity and debt. You could add these to this portfolio to improve its allocation and quality or alternately sell your current holdings. But with less than a year since you have brought these schemes this will open up the portfolio to short-term capital gains tax, which can be as high as 30 per cent, if you have any profits. Alternately, if you have losses these could be used to offset profits elsewhere to make the best of a bad situation. Another course of action could be to invest in a Fund of Funds scheme, which provides your desired allocation.

As for when is the best time to invest, the honest answer is that no one really knows. What is more important is your investment horizon, which should be at least three to five years for equities. Regular rebalancing of the portfolio along the way (if it is needed) should keep you in good stead.

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