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After losing heavily in the 2000 debacle, my exposure to mutual funds has been limited to liquid funds. But after reading Mutual Fund Insight, I am now planning to invest in equity funds. Please advice on my selection of funds
-Sharat Jain

I am 36-years-old and manage investments of my family members in fixed income securities and real estate. After burning my hands in the 2000 equity market debacle, our exposure to mutual funds has been limited to cash funds and floaters to park surplus cash. However, looking at the current bull run, I feel I have missed the bus. After reading the Scorecard section of Mutual Fund Insight, I have now gathered some courage to start investing in equity funds and have shortlisted some schemes. I have a long investment horizon of five to eight years. Please see if the allocation is suitable.
-Sharat Jain


Your aversion to the equity markets is understandable. Whoever has suffered the year 2000 debacle would think twice before entering the stock markets, even through mutual funds. But given the fact that equities are the only vehicle suited for the long term, you can't ignore them completely, especially if you have a long investment horizon. Therefore, it's good to see that you have regained your faith in the equity markets.

Now let's get back to your planned portfolio. When we scanned your funds with the Value Research Portfolio Manager, we observed the following points:

Equities dominate the portfolio with 77.45 per cent allocation. Debt securities account for 15.23 per cent of the assets, while the rest is in cash. Most of your funds enjoy the highest rating from Value Research. At the sector and stock level, your portfolio is well diversified with no stock accounting for more than 3 per cent of the total assets. In terms of capitalisation, your funds are packed with relatively riskier mid- and small-cap stocks that together account for two-third of your portfolio.

While your overall portfolio looks in place, there's one thing that's bothering us. Most of your equity funds are quite volatile. In fact all your diversified equity funds' standard deviation is more than the category average. Considering that you have completely shun risk since 2000, this might not be an apt investment strategy for you. You also seem to have given a high weightage to funds with strong recent performances. For example, Magnum Global's past performance has been disappointing.

We feel you can take three steps to improve your portfolio. You can add a predominantly large-cap fund like Franklin India Bluechip to lead your portfolio. Your can also move some money from your mid-cap funds like Franklin India Prima and Reliance Growth to a fund like HDFC Equity which maintains a balance between large- and mid-caps. Secondly, HDFC Taxsaver and HDFC Long Term Advantage are almost similar as far as capitalisation is concerned. Therefore, one of these funds could make way for a large-cap dominated fund like Franklin India Taxshield. This will also diversify your tax-planning allocation across two AMCs. Overall, these two changes should bring down your mid-cap allocation and make the portfolio less volatile.

Finally, we feel you can do without a MIP at this stage. Instead, you can think of adding a pure debt fund at a later stage.