Avoid Sector Funds | Value Research I will retire in four years. My current fund portfolio is worth Rs 10 lakh. I also plan to invest Rs 3 lakh for around seven to ten years and get an average return of 1.5 per cent per month. Are these expectations realistic? -Hemant H Sonar
The Plan

Avoid Sector Funds

I will retire in four years. My current fund portfolio is worth Rs 10 lakh. I also plan to invest Rs 3 lakh for around seven to ten years and get an average return of 1.5 per cent per month. Are these expectations realistic? -Hemant H Sonar

I am 54 and will retire in four years. I have been consistently investing in mutual funds for the past ten years. My current portfolio is worth Rs 10 lakh. I can hold on to these funds for five to seven years. I also plan to invest Rs 3 lakh for around seven to 10 years and get an average return of 1.5 per cent per month. Are these expectations realistic? What should I expect on monthly a basis?
-Hemant H Sonar

Existing Portfolio
Funds  % Allocation
Franklin FMCG-D 11.91
Franklin India Bluechip-D 6.63
Franklin India Flexi Cap-D 2.19
Franklin India Flexi Cap-G 4.08
Franklin India Prima Plus-D 2.91
Franklin India Prima-D 3.60
Franklin India Prima-G 2.65
HDFC Capital Builder-G 1.99
HDFC Equity-D 6.05
HDFC Equity-G 2.45
HDFC Growth-G 3.65
HDFC Long-term Equity-G 0.20
HDFC Premier Multi-Cap-G 0.70
HDFC Top 200-D 2.65
HDFC Top 200-G 2.43
Tata Infrastructure-D 2.09
UTI Auto Sector-D 6.25
UTI Banking Sector-D 5.32
UTI Dynamic Equity-D 1.15
UTI Infrastructure-D 5.48
UTI Mastershare-G 3.74
UTI Mid Cap-D 3.72
UTI Opportunities-D 2.95
Sub Total 84.79
Franklin India Taxshield-G 3.38
HDFC LT Advantage Fund-G 3.35
HDFC Taxsaver-G 2.72
Pru ICICI Tax Plan-G 1.03
Templeton India Pension Plan-G 3.38
UTI Retirement Benefit Pension 1.35
Sub Total 15.21
Total 100
While you do have a fair amount invested in 5- and 4-star funds, a large chunk of your investments are in funds that have not been rated. This means that they are all relatively new offerings. Some of these are less than three years old while others are sector funds. Such funds can be easily avoided. The purpose of a sector fund is only to supplement. Also, it makes sense to invest in funds that have been around and proved their worth rather than a brand new offering.

Another observation is that you have invested in both the dividend as well as the growth option of the same fund increasing the complexity of your portfolio. If you prefer getting a dividend income as and when it is declared, then go for that option. Otherwise, opt for growth and let compounding work in your favour. In our suggested portfolio, we have chosen only the growth option.

How to revamp?
Merely exiting all funds that are not rated will mean half the job done. After that, what is left is to pick the winners from the balance. We have attempted to do that by zeroing in on some of the best core funds in your portfolio.

We picked four funds, constituting 68 per cent of the portfolio, to play the lead role. With excellent performance records and a large-cap orientation, they are well placed to be your core funds. In your portfolio, you have allocated 15 per cent of investments to funds that provide tax incentives. In our suggested portfolio, we have retained the same allocation to tax-saving funds but have concentrated on two debt-oriented hybrids: Templeton India Pension Plan and UTI Retirement Benefit Plan. Avoid ELSS funds.

The reason we have suggested this is because retirement is not far away. Hence, it would be wise to increase the debt allocation to add to stability. And since these two also provide the tax incentive, they are a suitable choice. Though your investments will be locked for the time being, you can consider requisite amendments as and when the lock-in periods expire. We have provided for the mid-cap allocation through an increased allocation to two good mid-cap funds: Franklin India Prima and HDFC Capital Builder.

With these amendments, the number of funds is now more manageable with an increased debt component. The allocation to stable large-caps has gone up and the portfolio is now dominated by five- and four-star funds.

We focussed on consolidating the funds already present in your portfolio. But if lack of fund house diversity bothers you, add Reliance Vision to your portfolio and reduce the allocation to HDFC Equity and Franklin India Prima Plus. And you can also replace one of the two mid-cap funds with Sundaram Select Midcap. As for the new investment of Rs 3 lakh is concerned, for which you have a longer time horizon, you can avoid hybrid funds for the time being and replace them with Franklin India Taxshield and HDFC Taxsaver (if tax-saving is an objective). Retain the other constituents of the suggested portfolio. Apart from this you can consider increasing the weight of mid-caps by adding Sundaram Select Midcap. DSPML Opportunities is also a good option for this portfolio.

Changes down the road
Since you have an investment horizon of five to seven years, you can afford to have an equity-dominated portfolio. But subsequently, say in about three to four years, gradually start decreasing your equity holdings. Channelise the money towards debt-oriented funds and monthly income plans.

You can consider switching to Templeton India Pension Plan provided you are comfortable with further lock-ins. Another fund worth considering is UTI Variable Investment Scheme. This is an asset allocation fund quite conservative by design.

Suggested Portfolio
Funds  % Allocation
Franklin India Bluechip-G 20
Franklin India Prima Plus-G 15
Franklin India Prima-G 7
HDFC Capital Builder-G 10
HDFC Equity-G 15
HDFC Top 200-G 18
Templeton India Pension Plan-G 10
UTI Retirement Benefit Pension 5
Total 100
What can you expect?
It is not wise to have any expectations in terms of monthly returns from an equity funds portfolio. There are bound to be wide variations in returns on a month-to-month basis. The experience of the last few months is a proof of that. Over a long-term, achieving an average return of 1.5 per cent per month is realistic, but expecting that much every single month is wishful.

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