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A Conservative Portfolio

I am a 29-year-old and self-employed. My portfolio is worth Rs 3.6 lakh. I am also planning to start an SIP of Rs 2,000. I have a long investment horizon. How can I improve my portfolio? -Sumeet Dhawan

I am a 29-year-old and self-employed. My portfolio is worth Rs 3.6 lakh, the details of which are there in the accompanying table. I am also planning to start an SIP of Rs 2,000. I have a long investment horizon. How can I improve my portfolio?
-Sumeet Dhawan



Sumeet's Portfolio
Investments  % Allocation
ICICI Bonds 5.28
P. P. F.  26.8
N.S.C.  20.83
SBI Life Pension Plan  2.77
LIC Jeevan Suraksha  2.77
Mutual Funds  % Allocation
Alliance Basic Industries Fund  1.95
Alliance Buy India Fund  3.06
Alliance New Millennium Fund  1.38
Franklin India Blue Chip Fund  0.42
Franklin India Prima Plus  2.94
HDFC Prudence Fund  3.47
HDFC Long Term Advantage Plan  5.45
Prudential ICICI Technology Fund  3.33
UTI Master Value Fund  1.95
UTI Retirement Benefit Plan  7.6
UTI ULIP  10
Total  100

Given your young age and your admirably long-term horizon, your portfolio is way too conservative. Your current portfolio lacks the earnings firepower that a long-term portfolio of someone in his twenties should have. Someone of your profile should be investing much more in equities.

Here are the specifics, as pointed out by the Portfolio Checkup tool on valueresearchonline.com. 69 per cent of your assets are in fixed income and just 28 per cent in equities. At your age, this ratio should actually be the other way around.

There's an additional problem with your equity holdings. Nearly 59 per cent of your equity is in the relatively risky mid- and small-cap stocks. Our first advice is to increase equity exposure over the next few years. This can be achieved by either exiting debt funds or by bringing additional investments into equity funds.

As far as fund selection goes, we are not too convinced about Alliance Buy India. A 5.14 per cent return since launch in January 2000 is quite discouraging.

The fund maintains a high exposure to risky mid-caps and has a concentrated its portfolio both at stock as well as sector level.

For example, the fund had 70.71 per cent of its assets invested in just three sectors at the end of 2004. Similar, its top five holding accounted for more than 48 per cent of assets.

If you don't understand technology sector well, exit the two tech funds. By their very nature, sector funds are the most risky among equity funds.

You can invest the realised amount in one or two diversified equity funds--you already have them in your portfolio. These steps would not only decrease your debt allocation but also reduce mid- and small-cap exposure.

As far as your planned Rs 2,000 SIP is concerned, we would recommend some good diversified equity funds like Franklin India Bluechip, HDFC Equity, or HSBC Equity.

You have time by your side. Equity is the vehicle through which you can create wealth over the long term. Happy investing.