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We have investment of about Rs 12 lakh in Mutual Funds. Is there any point in holding on to the sectoral funds? On maturity of some of my bank FDs, I intend to invest some of that money in MF. Should I invest this in MIPs or STPs or diversified equity?

Both me and my wife pay income tax at top rate. Our basic financial needs are more or less met by our income from investments in Relief Bonds, Savings Bonds, Bank FDs and P.O. MIS. We also have investment of about Rs 12 lakh in Mutual Funds, details of which are provided alongwith. My queries are:

1. Which MF schemes should I close and divert elsewhere. Is there any point in holding on to the sectoral funds under Item 3?
2. On maturity of some of my bank FDs, I will have an investable amount of Rs 15 lakh by end of this year. I intend to invest Rs 10 lakh in the 9% GOI Bonds for Senior Citizens and the rest in MF. Should I invest this in MIPs or STPs or diversified equity? Liquidity and safety is an important consideration.

Please remember that my age is 66 years and I have low to medium risk taking ability. Please advise.
Subir Chatterjee

The first aspect we would like to highlight with regard to your portfolio is that there seems to be a high degree of duplication. You have invested into 6 MIPs, 8 diversified equity funds, 3 technology funds and 5 balanced funds. This creates the problem of having to track a large number of investments without bringing much advantage. Hence, our first and foremost advice to you would be to reduce the number of funds you have invested into. Moreover, while choosing these funds you should go by a high quality rating and a long and successful track record. For this you could use the Value Research Scorecard.

As far as your mutual fund investments are concerned, the debt portfolio accounts for more than half of your investments and are of high quality. On the other hand, your equity portfolio comprises of 47.4 per cent, which is high for your profile. However, taken in conjunction with your investments in other fixed income securities, which are quite substantial, we feel the situation is not alarming. In fact, given your age, you are better placed with substantial investments in these risk-free securities as these contribute to the security of your investments.

Our concerns as far as your equity portfolio is concerned are that - currently, mid- and small-cap stocks constitute over half of your portfolio. This we believe could be a risky strategy for someone of your age. Another major area of concern revolves around the sectoral bets that you have placed especially in the technology, healthcare and automobile sectors which together account for almost 40 per cent of your holdings.

To answer specifically the first question that you have posed to us - we feel that shifting your investments in sectoral funds to diversified equity funds would be a good idea as it would enable you to have sectoral exposures within reasonable limits. You could look at a top-rated fund as this would enable you to both diversify you investments across sectors and at the same time decrease your exposure to mid and small cap stocks.

As far as making an additional investment of Rs 5 lakhs is concerned, given your investment objective of liquidity and safety, we feel you should not increase your exposure into equity. Among debt-oriented funds, if the expected rise in interest rates does come about, long and medium term debt funds will take a hit. In such a scenario, you should consider investing in floating-rate funds and short-term debt funds. A floating rate fund is designed to benefit from an interest rate hike unlike other debt funds which deliver good returns when interest rates slide. Similarly, a short-term debt plan makes investments only in short maturity debt instruments. The low average maturity of their portfolio prevents a sharp fall in their NAV when interest rates rise.

So reduce the number of funds in your portfolio, transfer a substantial part of your debt allocation to floating rate funds and short-term plans and do not lower your holdings in low-risk investments.

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