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Too Aggressive

I have a portfolio worth Rs 8 lakh. My objective is to accumulate wealth by investing in equity diversified funds with a time horizon of two to three years. Is my portfolio on right track? -Navin Jagesha

I am a chartered accountant by profession and an NRI settled abroad. I am an aggressive investor and have a portfolio of mutual funds worth around Rs 8 lakh. My objective is to accumulate wealth by investing in equity diversified funds with a time horizon of two to three years. Is my portfolio on right track?
-Navin Jagesha

Your portfolio is just too aggressive. After taking your investments through Portfolio Check-up at www.valueresearchonline.com, we discovered that you are missing out debt. Almost 95 per cent of your investments are in equities and the rest in cash. Barring Franklin India Bluechip, all the funds held by you have relatively riskier mid- and small-cap stocks in bulk.

In fact, Franklin India Prima, which accounts for 52.33 per cent of your portfolio assets, has exceptionally high exposure to mid- and small-cap stocks-as much as 92.97 per cent.

Overall, large-cap stocks make 37 per cent of your portfolio, while the mid- and small-cap exposures are 43.79 and 18.71 per cent, respectively, as on December 27, 2004.

As far as quality of funds is concerned, you are in a great position-none of your funds have been rated below four stars by Value Research. The two non-rated funds held by you are good as well. Both of them have delivered a top quartile performance in 2004. Launched in December 2002, HSBC has already established itself as a respectable member of the diversified equity funds' category, while Tata Equity Opportunities too has done well.

Your present asset allocation is relatively risky and makes the portfolio highly volatile. So far, this strategy has worked for you given the prevailing rally in mid-cap stocks. However, your profits might erode fast in a declining market.

In our view, you should do two things to make your portfolio solid. First, invest in debt funds and second, ensure relative reduction in allocation to mid- and small-caps in your equity funds.

This can be done in several ways. You can invest in one or two good income funds. As a long-term investor, no doubt you should bank heavily on equities but it's also true that no portfolio is complete without a debt holding.

Alternatively, you can also consider equity-oriented hybrid funds. Such funds generally maintain a 60:40 equity:debt allocation which gives them the power of equity and at the same time the much needed stability.

Coming back to the allocation to mid- and small-caps, you should reduce the exposure to them to below 30 per cent. This you can achieve by making fresh investments in Franklin India Bluechip. Alternatively, since you are already making huge profits in Franklin India Prima, we would suggest you book some profits and invest the proceeds in one or two balanced funds.

This should bring down your mid-cap exposure to a comfortable level and also make your overall portfolio stable through debt allocation.