I have been investing in mutual funds since August 2005. Kindly comment on the quality of my portfolio and also suggest measures to trim the number of schemes since it is difficult to monitor so many funds. All my investments are made with a time horizon of 5-15 years. I look forward to investing only in equity schemes as I already have other investments in debt instruments.
-P Sanjay Kumar
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To put things in perspective Rs. 8, 37,000 invested by you has accumulated to an Rs. 11,28,000, not counting dividends amounting to nearly Rs. 43,000 that you have already received. And this, you have achieved in a matter of close to 2 years as bulk of your investments in mutual fund schemes were made over 2005 and 2006. While your strategy has fared very well, you could boost future performance primarily by consolidating some of your holdings.
We noticed a very discernible strategy adopted by you which is to invest essentially in NFOs. While there is nothing wrong in such a strategy, there are many pitfalls to an over reliance on NFOs. Given that not a single equity fund has lost money over the past year, you have been fortunate not to have made any losses. A stable performance over a period of time is a good indicator of the quality of fund management. NFOs usually take some time in finding their ground. Another issue with NFOs is that of timing of investments.
While new funds deploy money gradually there is always the risk of deploying money during a bull rally, followed by a bear phase. In our September 2006 issue we reported how many new funds were sitting on a pile of cash and had invested their money in short term instruments as they could not find an opportune time to invest.
A lot of investors misinterpret diversification as adding a lot of funds. You need to realise that by investing in a fund you are already diversifying your investments across many stocks. By further spreading your investments among a large number of mutual funds, you are essentially fragmenting your holdings and this serves no purpose at all.
The Untouchables
Funds listed under PART II have been retained in their current proportions for now due to the lock in periods and/or high exit loads that you would incur. Your tax planning funds account for a 13 per cent weight age and are spread across 4 funds, any future ELSS investments should be restricted within these funds, rather than adding more funds to your portfolio. Magnum Tax Gain in fact wins over the other three with its stellar performance; it has been ranked number one in its category for the last 5 years. Reliance Tax Saver is another scheme that has shown promise in its 18 month existence. Similarly, investments in close ended NFOs has not entered the consideration set, primarily due to the high exit load that you will have to bear if you exit them now.
Spruce Up
We have reduced your 28 funds portfolio to 15 funds and in doing so increased your exposure to rated funds that have a proven track record. While your exposure to new unrated funds continues to be on the higher side, we have picked the best of the lot from your portfolio while purging many of your small and scattered holdings.
There is scope for consolidating your holdings in the two infrastructure funds. The sector itself has been extremely profitable over the last year with a promising potential. We have hiked the allocation to UTI Infrastructure, which has done very well, and dropped Birla Infrastructure from our suggested portfolio.
Your total exposure to funds that have a large cap mandate is close to 22 per cent spread across 8 funds. Out of your funds, we have given preference to Birla Sun Life Frontline Equity, Fidelity Equity, Franklin India Flexi cap and Reliance Vision to form the core of your portfolio.
Your total investments in thematic funds amount to a whopping 43 per cent! We have reduced this to 13.5 per cent spread across two funds. The mandate of Sundaram BNP Paribas S.M.I.L.E is to invest 65 per cent of its assets in small and mid cap stocks making it very similar to Sundaram BNP Paribas Select Midcap. We suggest you switch out of it into Sundaram BNP Paribas Select Midcap. While we have retained Templeton India Equity Income, we suggest you keep a close eye on the fund. The strategy of a dividend yielding stock portfolio has not worked of late and will reveal its success or failure over time. But the charm of this fund lies in the fact that it also invests in markets abroad, thus adding a new dimension of diversification to your portfolio. It has done well in a short span, and you entered the fund at a good time.
Your holdings in UTI Auto Sector, UTI banking Sector, Magnum Multiplier Plus are very small; as a result the sensitivity of your portfolio to the performance of these funds is negligible. While the banking sector itself is very promising, you have a considerable exposure to the sector at 14 per cent. Therefore you could reallocate your holdings from these funds.
Further, avoid investing in NFOs and thematic funds in future.
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This article was originally published on March 14, 2007.
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