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Stick to Five-Star Funds

I wish to retire after five years. I have invested about Rs 25 lakh in 32 funds, but now I want to confine my portfolio to 10-12 funds. My aim is to earn 5-7 per cent return after retirement.-Rajala Rao

I wish to retire after five years. So far, I have invested about Rs 25 lakh in 32 funds. I want to confine my portfolio to 10-12 funds. I don't need money for another 3-4 years. My aim is to earn 5-7 per cent return after retirement.
-Rajala Rao



Rao's Portfolio
Funds  % Allocation
Birla Equity Plan 4.15
Birla MNC 2.11
Birla Sun Life Basic Industries 0.82
DSPML Equity 5.33
Franklin India Bluechip 2.93
Franklin India Prima Plus 2.93
Franklin India Prima 2.36
Franklin India Taxshield 2.93
HDFC Equity 4.06
HDFC LT Advantage Fund 4.31
HDFC Prudence 2.24
HDFC Taxsaver 5.82
HDFC Top 200 3.57
HSBC Equity 5.94
Kotak 30-D 1.95
Kotak Balance 1.83
Kotak MNC 1.83
Magnum Contra 2.11
Magnum Emerging Businesses 1.71
Magnum Pharma 4.07
Principal Resurgent India Equity 4.19
Pru ICICI Tax Plan 1.47
Reliance Growth 7.31
Reliance Vision 5.49
Sundaram Select Midcap 1.83
Sundaram Taxsaver 1.38
Tata Equity Opportunities 1.54
Tata Tax Saving Fund 1.06
Templeton India Pension Plan 2.47
UTI Equity Tax Savings Plan 1.64
UTI Master Value-Income 4.31
UTI Petro 4.31
Total  100


It's an old hackneyed saying that too much of anything is bad and that's true for diversification also. Rs 25 lakh spread over 32 funds, including large-, mid-, sectoral and balanced funds across 13 AMCs is way too much diversification. Your portfolio is over-diversified and may lead to dilution of returns. However, it's good to see that you have finally decided to consolidate.

Let's first see how your portfolio stands today. Equities form 90.60 per cent of your assets, followed by 2.94 per cent allocation to debt and 6.46 to cash. Mid- and small-cap stocks lead your portfolio with 48.77 per cent allocation. Large-caps constitute 48.36 per cent. Majority of the funds enjoy five or four stars from Value Research.

Since you would start consuming your investments after five years, 90.60 per cent allocation to equities may be right today but you should gradually shift some part of your portfolio to relatively safer debt instruments. And here lies the first hint of consolidation-balanced funds like HDFC Prudence should enjoy major share. Now, the crucial point is which funds to exit. One way could be retaining only the five-star funds.

This would lead you to a set of 11 funds. You have nine tax-planning funds and they would come in way of your consolidation plan as they come with a three-year lock in. Therefore, one way to approach the overhaul could be treating your investments as two portfolios-one with all the tax-planning funds, and the rest of funds. Then retain only the five-star funds. For the tax-planning portfolio, you can wait for the lock-in to get over and then follow this rule.

If you are dependent only on mutual funds for your post-retirement needs, attempt to form a portfolio led by high-quality balanced funds. They would offer stability and at the same time earn decent returns. Your target of generating 5-7 per cent return should not be a problem for them.