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Prune Your Portfolio

I am 51-years-old and depend on my investments for regular income. My mutual fund holdings constitute 50 per cent of total assets. Is my portfolio too aggressive?
-F B Patel

I am 51-years-old and depend on my investments for regular income. The mutual fund holdings constitute 50 per cent of my overall portfolio, with the rest invested in post office monthly income schemes, term deposits, RBI 6.5 per cent tax free bonds and Rural Electrification Corporation's capital gains bonds. Is my portfolio too aggressive?
-F B Patel

While taking your investments through the Value Research Portfolio Manager, we discovered the following things about your portfolio:

Your mutual fund portfolio is almost all-equity with 8.33 per cent allocation to cash. Most of the funds are less than three years old. Relatively riskier mid- and small-cap stocks account for more than 57 per cent of your mutual fund investments. At the sector and stock level, you have a well-diversified portfolio.

Even as half of your total investments are in safer instruments like RBI bonds and post office schemes, your mutual fund portfolio does not seem to be complementing your risk profile. An all-equity mutual fund portfolio heavily skewed towards mid- and small-cap stocks and spread over 27 funds looks ill-suited for you. If the markets tank sharply from here, you are likely to lose heavily.

From here on, we feel you should seriously consider pruning your portfolio to a manageable level. You don't need to collect funds for an effective portfolio. Since you have already invested in new funds, don't rush to exit out of them or you will be liable to pay short term capital gains. Plan you way out over the next one or two years. While rebalancing your portfolio, stress on large-cap dominated funds. You can also consider balanced funds like HDFC Prudence or Kotak Balance (see Value 50 for more).

We also see a lot of duplication in your portfolio. For example, you have too many mid-caps dominated funds like Chola Midcap, Franklin India Prima and Reliance Growth to name a few. We feel you should keep a fair distance from them. While some of them have commendable performance records, they may not be the ideal investments for you. Therefore, limit your allocation to such funds.

Finally, try to avoid new funds. We know funds with exotic objectives and names are promising huge gains. Let their promises translate into reality first. After all, what's the hurry?

Patel's Portfolio
Fund  % Allocation
Chola Midcap Fund-D 4.39
DSPML T.I.G.E.R.-D 3.50
Franklin India Bluechip-D 3.59
Franklin India Prima Plus-D 2.44
Franklin India Prima-D 4.02
HDFC Capital Builder-D 3.90
HDFC Equity-D 4.00
HSBC Equity-D 4.40
HSBC India Opportunities-D 3.88
Kotak Global India-D 3.95
Magnum Contra-G 4.12
Magnum Global-G 4.02
Pru ICICI Power-D 3.54
Reliance Diversified Power Sector-D 2.46
Reliance Equity Opportunities-D 2.03
Reliance Growth-D 6.14
Reliance Pharma-D 2.07
Reliance Vision-D 5.96
Sundaram Growth-D 2.17
Sundaram S.M.I.L.E-D 2.57
Sundaram Select Focus-D 3.89
Sundaram Select Midcap-D 5.25
Tata Dividend Yield-D 1.69
Tata Equity Opportunities-D 4.79
Tata Growth-D 4.00
Tata Infrastructure-D 3.74
Tata Pure Equity-D 3.50
Total  100