I am a 32-year-old NRI IT professional. So far, I have invested Rs 9.5 lakh in mutual funds. All the current investment is under dividend payout. Should I change them to dividend re-investment? I am planning to invest Rs 50,000 each in SBI Magnum Contra and Sundaram Select Midcap. Is this fine?
-Shaik Muzubur Rehman
Before we review your portfolio, let's first clear the confusion on which option to choose. If you don't need your fund's gains back as dividend, there's no point choosing the dividend payout option. All the options are the same as far as returns are concerned. With the abolition of long-term capital gains tax, all equity-oriented funds are same from the tax angle as well if you stay invested for over one year. Therefore, if you want to let your money grow, choose growth or dividend re-investment option.
Coming back to your portfolio, we see the dominance of mid-cap funds. Nearly 58 per cent of your equity assets are allocated to mid- and smaller stocks. If you are a short- to medium-term investor, this strategy is undesirable. Of course, the reward is higher, but the risk is equally high. But given your age, this should not be a problem if you stay put for the long-term. We also notice that you have too many unrated funds in your portfolio. Half of your funds are less than three years old. While this may not be an exact criteria to rule out funds, why take chances? You need funds with proven track record in bull as well as bear phases. Going forward, we suggest you to also consider the age of a fund before committing money.
At stock as well as sector levels, your portfolio is well-diversified. Though the allocation is minor, it's good to see that you have not ignored debt as an investment avenue. The cash component of your portfolio is high (10.03 per cent). It's mainly coming from funds like Sundaram Select Midcap, Reliance Growth and UTI CCP Balanced.
Regarding investment in Magnum Contra and Sundaram Select Midcap, we feel you already have enough exposure to them. Investment in a balanced or large-cap fund would be a good idea here. Through a balance fund, you would not only strengthen the debt department, but also earn handsome returns. For example, a fund like HDFC Prudence has even outperformed majority of the diversified equity funds over a trailing three and five-year periods ending June 10, 2005. Additionally, they would also decrease your overall portfolio's susceptibility to wild market swings through a 60:40 equity-debt allocation.
Finally, make all your investment through the systematic investment planning route.
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This article was originally published on September 20, 2005.
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