I am a 70-year-old retired man without any pension benefit. I am solely dependent on income from investment of my savings. Due to a sharp fall in interest rates, I had to look for other avenues to augment my income and so started investing in mutual funds from September 2003. Having a low risk tolerance, I was a bit unnerved by the recent market collapse. I shall be thankful if you could offer me some advice. My need for regular expenses is about Rs 2.5 lakh annually and I am willing to stay invested for a long term with a reasonable degree of liquidity to meet emergencies.
H.L. Dutta
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Right at the outset we would like to complement you on your investing sense for a number of reasons. Firstly, given your age and your low risk-appetite, you have done a very wise thing by keeping the bulk of your investments in assured return instruments. Secondly, having fulfilled your requirement of capital preservation, you have smartly kept almost all your mutual fund investments in equity-oriented schemes, which in the long run have the maximum upside potential.
Thirdly, most of the funds in your portfolio have the best track record in their category. Finally, instead of putting small investments into a large number of funds, you have put in substantial investments in a small number of high quality funds. This is an intelligent thing to do as it enables one to do away with the arduous task of tracking the performance of a large number of funds. Moreover, unlike direct investing, a concentrated portfolio does not give rise to concentration risk as the fund portfolios themselves are diversified.
As regards your mutual fund portfolio, our analysis tells us that more than 90 per cent of your holdings are into equities and about 4.3 per cent into debt. But we are not unduly perturbed about this simply because your equity investments form just 30.6 per cent of your overall portfolio. This is all the more acceptable because more than 66 per cent of your overall portfolio is into assured return schemes.
A closer scrutiny of your equity portfolio reveals that almost 62 per cent of your holdings are into large cap stocks, again a very desirable feature of a portfolio that is seeking stability in returns. Mid-caps form a little more than 28 per cent of your equity holdings and should take care of the capital appreciation aspect of your return expectations.
However, there is one concern that we have about your equity holdings and that revolves around the fact that close to 20 per cent of your holdings are in technology stocks, potentially a very volatile sector. This is a result of the fact that barring Reliance Growth all the other diversified equity funds have close to 20 per cent exposure in technology stocks. Perhaps, a small rejig of your mutual fund investments, could help you avoid this overexposure. And if you are looking for transfers, remember that barring HSBC India Opportunities, which is a new fund, all the other funds have a strong performance history. Moreover, if you are looking at a fund hitherto untried for investments, look at its performance but at the same time watch out for its exposure in technology stocks.
A final parting advice for you and it is something that we have advocated all along. Remember that equity investments are for the long term and you should never get psyched out by short-term equity market fluctuations. If you are not yet convinced then take a look at Franklin India Bluechip whose annualised return since launch is a mind-boggling 25.65 per cent and this it has achieved through all the bearish phases, the stock scams and the dotcom bubble-burst. So keep your faith.
This article was originally published on October 08, 2004.
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