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Avoid New & Thematic Funds

My mutual fund investments are intended for long-term growth with a time horizon of more than 10 years. I made 30 per cent of my fund investments on May 10. Should I add balanced funds to my portfolio in the light of the May crash?
- Bish Mukherjee

I retired recently and seek your advice on my portfolio. I have residential properties for personal living as well as rental income, which account for 67 per cent of my net worth. My regular living expenses are met from pension and rental income. My children are well settled and do not need my support. My mutual fund investments are intended for long-term growth with a time horizon of more than 10 years. I have also set-up an account with a PMS. I made 30 per cent of my fund investments on May 10. I have been thinking of adding balanced funds in the light of the May crash.
- Bish Mukherjee

Existing Portfolio
Funds  % Allocation
Part I  
Fidelity Equity 2
HDFC Equity 2
HDFC Top 200 2
Magnum COMMA 2
Magnum Emerging Businesses 2
Magnum Global 3
Reliance Equity 20
Reliance Growth 10
SBI Bluechip 2
Standard Chartered Classic Equity 6
Sundaram Capex 2
Sundaram Select Midcap 10
Tata Infrastructure 10
Sub-Total  73
Part II  
HDFC LT Advantage Fund 3
HDFC LT Equity 12
HDFC Taxsaver 3
Magnum Taxgain 3
Pru ICICI Taxplan 6
Sub-Total  27
Total  100

It is quite unfortunate for you to have invested a chunk of your money on the day when the markets were at their highest levels. But do not worry. As long as you have time by your side, your losses are likely to be only temporary. But make it a point to route your equity investments through the systematic investment plan route from now on.

Coming to your portfolio, we do feel there is scope for changes. First, let us identify the problems. The most prominent problem is the presence of too many small holdings. Most of your fund holdings are so small that good performance of any of them will have a negligible impact on your overall portfolio. This achieves little except making things complex and difficult to track. Therefore, one of the tasks at hand is of consolidation.

Another problem is that your portfolio is full of new funds (58 per cent of your money is invested in the funds which are not yet rated by Value Research). And some of these have a very narrow objective of investing in a particular sector or theme and can best play a tactical role in the portfolio. You can easily do without both of them.

Even among the older funds, more aggressive and racy funds account for a larger share while the ones that should be at the core of a portfolio have thin presence. Therefore, the task at hand is to increase the weight of the core funds which have excellent long-term record and consolidate the portfolio by reducing the number of funds.

Suggested Portfolio
Funds  % Allocation
DSPML Opportunities 10
Franklin India Prima Plus 20
HDFC Equity 5
HDFC LT Equity 12
HDFC Prudence 15
HDFC Taxsaver 10
Magnum Taxgain 5
Reliance Growth 5
Reliance Vision 10
Sundaram Select Midcap 8
Total  100

At this instance, we would like to mention that your current portfolio has been dividend into two parts - Part I comprises investment in open-end equity funds, while Part II constitutes tax-planning and close-end funds. Let us start with Part II.

Since your investments in the tax-planning funds will be locked for the time being, there is little that can be done. But over the period of time, you can consolidate it into two funds (see the suggested portfolio). We have allocated 15 per cent to them, same as the present weight of tax-planning funds, but you can increase or decrease it as per your tax considerations.

That leaves HDFC Long Term Equity Fund in Part II. While we feel 12 per cent is a far too high allocation to it, but you should still stick to it for the time being as there is no point booking losses as well as paying a steep load of 4 per cent. If in future, this fund disappoints, shift this money to HDFC Equity. And for the fresh investments from here on, replace this fund with HDFC Equity so that gradually its proportion comes down.

Coming to the large and fragmented Part I, we have retained few of your holdings as all the new untested funds have paved the way for some of the most dependable funds available today. We have also removed the racy funds from our suggested portfolio and it is not difficult to explain the reasons for the same in the aftermath of the May collapse. Just compare their performance with the category over the last couple of months to get a sense of their volatile nature. We believe you can earn good returns with more stability with the funds that we have put in.

Your decision to add a balanced fund seems quite prudent. A little bit of debt component will only enhance the stability. Moreover, this could be the investment that you may consider redeeming in future when you need some money, as you have mentioned.

The recommended portfolio comprises funds with a 'go-anywhere' approach. This will minimize the need for you to take decisions actively. You will have to act yourself only if any of these funds' performance turns dud. The decisions regarding sectors and stocks can be left entirely to the fund managers. This would not be possible with your present portfolio which includes some of the narrowly defined funds.

Lastly, since you also have a PMS portfolio, we would suggest you to try and balance out your fund and PMS investments. We believe that a lion's share of your equity investments should go to mutual funds and that is why we have toned down the aggression of your mutual funds portfolio by increasing the weight of more stable large-cap oriented funds.

Maybe you can afford to be a little more adventurous with your PMS portfolio, if you so desire.