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Trim Down Your Portfolio

I am a retired Army officer. Over a twenty-year period I have built a portfolio consisting both of mutual funds as well as stocks. I would be grateful if you could analyse my portfolio and suggest changes so that I can improve the returns generated on my investments.
-Brig Rajinder Nath Lambah (retd)

Total Asset Allocation
Fund  Portfolio(%)
Stocks 60.25
Mutual Funds  
Birla Dividend Yield Plus-G 1.17
Birla Mid Cap-D 1.14
Birla MIP II Savings 5-G 0.78
Birla MIP II Wealth 25-G 1.26
Canbonus 0.19
Canganga 0.46
DSPML Savings Plus Moderate-DQ 3.04
Franklin IIF NSE Nifty-D 1.13
Franklin India Bluechip-D 2.15
Franklin India Bluechip-G 0.81
Franklin India Index Tax Fund 0.55
Franklin India Prima-G 1.71
FT India Dynamic PE Ratio FoF-G 1.91
HDFC Equity-D 0.66
HDFC Equity-G 2.06
Principal MIP-DQ 8.98
Reliance Diversifed Power Sector-D 1.00
Reliance MIP-DQ 2.52
Reliance Vision-G 2.00
Templeton MIP-G 2.28
Unit Scheme 2002-G 0.31
UTI Banking Sector-D 0.28
UTI Basic Industries-D 0.31
UTI Growth & Value-DH 0.69
UTI Large Cap-D 0.29
UTI Master Plus '91 0.85
UTI Mastershare 0.56
Total of Funds (% of total holdings) 39.75

Let us start with a broad picture of the current state of your investments. At present, your portfolio consists of 29 funds and 63 stocks. Frankly, this is too large for an individual to manage. By comparison, consider the fact that the entire portfolio of two of India's top equity funds — Franklin Bluechip and HDFC Equity — consists of 29 and 28 stocks, respectively. Investing is not just about deciding where to put in your money. It is as much about keeping track of those investments, so that any decay in performance can be identified and corrective action taken. This entails reading the annual reports, half-yearly reports, quarterly newsletters and keeping track of your fund's portfolio. In case of stocks, again a similar effort is required in tracking company-specific news, annual reports, etc. It is impossible for one person to do this for 29 funds and 63 stocks! The size of your portfolio should definitely be trimmed.

Let us start with your fund portfolio. A little more than 50 per cent of your total mutual fund holdings are in equity, another 42.25 per cent in debt securities and the remainder in cash and money market instruments. However, since you also have a substantial amount of holdings in stocks, it is important to look at the overall picture. Of your combined portfolio, 80.65 per cent is in stocks, almost 16.3 per cent in debt securities and the rest in cash and cash equivalents. This, we feel, is way above the comfort zone for someone in your age group.

An ideal asset allocation for someone like you would be 35-40 per cent in assured return investments such as GoI bonds, PPF schemes or post office MIS. A new avenue that has been introduced by the government in this regard is the Senior Citizen Savings Scheme. The scheme assures a 9 per cent return on your investment with a lock-in period of five years. However, the investments can be liquidated prematurely but you will have to pay an entry load of 1.5 per cent of the investment amount in case the redemption request comes in after one year. Thereafter the entry load for pre-mature redemption would be 1 per cent. The maximum investment limit on this instrument is Rs 15 lakh.

Of the remaining amount, the equity-debt allocation can be 50:50. In other words, your equity exposure should not be more than 30-35 per cent of your total holdings. The reason being that equity by nature is volatile and so the short-term returns can fluctuate wildly. In the long-term of course equity is probably the best bet, but how long is this long-term one can never be sure. For instance, the next bull run could be just round the corner. Or, alternatively, the markets could get into a bearish phase and remain depressed for the next five years. At your age, we feel that the need is more for regular returns than for substantial capital appreciation.

The other avenue that you could look at would be hybrid equity-oriented/debt-oriented schemes. You could put a substantial share of your portfolio, apart from your assured return investments, in these schemes. Equity-oriented schemes, typically have an asset allocation of almost 65 per cent in equity and the rest in debt. You could look at HDFC Prudence in this regard, which has a fabulous track record spanning over 10 years (with returns since launch of 19.40 per cent as on September 22, 2004).

In case you are more interested in debt-oriented hybrid schemes, MIPs could be another alternative. Even though you do have a substantial amount of holdings in MIPs they are again spread over six funds, quite unnecessary. You should instead look at consolidating these into a couple of funds, with a good performance track record, like Tata MIP or FT India MIP.

Coming to your direct equity holdings, almost 50 per cent of these are in large-caps and another 24.75 per cent in mid-caps. But the part we are really worried about is your small-cap holding. 25.2 per cent in small-caps is way too risky for the simple reason that liquidity issues could arise on these holdings almost overnight. A case in point is that four of your stocks have been de-listed. Moreover, you have a 14.5 per cent exposure to the energy sector, again very volatile by nature. Moreover, as the appended table illustrates, there is a high degree of duplication between your direct equity investments and your equity holdings through mutual funds. It is in your own interest to liquidate most of your direct equity investments and reinvest these through a few select diversified equity funds like Franklin Bluechip, HDFC Equity, etc.

One thing that you need to keep in mind while shuffling your portfolio is the tax implication. One advantage that you have with your portfolio is that a bulk of your investments is long-term. So, in case you decide to redeem some of these investments there would be little capital-gain tax liability.

To sum up, we feel there is an urgent need to restructure your portfolio. Your direct equity investments need to be consolidated or perhaps even transformed into equity mutual fund holdings so that the job of tracking these investments can be passed on to those who have acquired an expertise in it. You could use the Value Research Scorecard while choosing these funds. Your mutual fund investments can be consolidated into two high -performing funds from each of the following categories — diversified equity funds, equity/debt-oriented hybrid funds and MIPs. We are confident that this will not just reduce your investment-related anxiety, but your returns too will improve.