I have two children. My parents are dependent upon me. A total of 66 per cent of my investments are in bonds and PPF. The rest of the money is invested in shares and mutual funds. Please review my portfolio and suggest ways to enhance it.
- Anonymous
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Given the number of dependents, the asset allocation of your portfolio is spot on. However, we would like to sound a word of caution that too much investment in PPF is not always advisable. Most people settle for lower returns just because they are assured.
Rather than investing a high amount in PPF, you should consider investing a part of your money in hybrid mutual funds in future. Although you won't get the surety of returns on this allocation, but it will definitely have the potential to enhance your return significantly with moderate risk.
With a long term time horizon (as you would anyways bear with a 15 year lock-in under PPF investments) the risk of returns on equity would reduce significantly. Further a high debt component of hybrid funds would protect your investment from a downside. Such a move would also increase the liquidity of your portfolio, as hybrid funds do not carry a lock-in period. For this you can choose between equity oriented and debt oriented asset allocation. The average category return of hybrid equity-oriented funds over the last five years has been 31 per cent, while the returns posted by the debt-oriented funds over the same period has been 17 per cent.
Consolidation Holds Key
The need of the hour is consolidation of your equity holdings. Given that a 34 per cent exposure to equities is further spread across 21 funds, you seem to have fallen in the trap of over diversification. While equity is a high-risk asset class and diversification, can to a large extent, reduce this risk, there is something as too much diversification. Our proposal reduces the number of funds to 14.
As of now you hold eight large-cap funds, we suggest you consolidate your holdings amongst them by trimming down the average performers. Towards this objective, you can move your money from ABN AMRO Equity and Tata Pure Equity fund to Reliance Vision. This would take up the equity allocation to Reliance Vision to 12 per cent. Consolidation of your mid-cap holdings can be initiated by moving funds from Tata Equity opportunities to Reliance Growth, thereby taking the allocation to Reliance Growth to 15.59 per cent.
Reduce Thematic Funds
You have six thematic funds accounting for 30 per cent of your investment. Some of these funds do not hold any great opportunity. We suggest that you switch your investments from Kotak Contra and Kotak Global India to Kotak 30. With their small holdings, these funds are adding little value to your portfolio. In order to further rationalise your exposure to thematic funds, we suggest you retain DSPML Opportun-ities and T.I.G.E.R. You could consider moving funds from Standard Chartered Enterprise Equity to HSBC Equity and HDFC Equity funds in equal proportion as and when the liquidity window of Standard Chartered Enterprise Equity is open. A few other funds that you could remove from your portfolio gradually are HDFC Capital Builder and Kotak Mid Cap. You could reinvest this money in a mid -cap oriented fund that has a good track record. Keep a close eye on Reliance Equity. Give it some time to prove itself and accordingly take a call on this fund. Another potential area for consolidation lies in the reserves invested with the Franklin Templeton family. You are currently invested in Franklin Templeton Bluechip, Prima and Flexi Cap. Bluechip is targeted at the large cap stocks and Prima concentrated on the mid-caps.
At the same time Flexi Cap freely moves money between large, mid and small caps depending on the highest potential for return. Further the three schemes are managed by the same fund manager. Hence, given the large-cap bias of your portfolio you could consider consolidating your holdings here by moving funds out of Bluechip and Prima to Flexi Cap.
Mix 'n' Match
While we have suggested quite a churn in your portfolio, you need to evaluate this change with respect to the entry and exit loads. The manner in which you implement this churn is equally important. The churn must be in a phased manner. To avoid short-term capital gains tax, you can plan this consolidation by liquidating only those funds which you have held for more than a year. You shouldn't be deterred by these expenses. In future be sure to understand the objective of the fund and ascertain whether it fits within your risk appetite.
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This article was originally published on March 01, 2007.
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