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Portfolio Makeover: Equity for Long Term

I have been investing in MFs since Oct 2005. Most investments have been via SIP route. Apart from lump sum investments in some funds, I plan to continue investing through SIPs for five years. I am investing with a time frame of 8-10 years for my daughter.

I have been investing in MFs since Oct 2005. Most investments have been via SIP route. Apart from lump sum investments in some funds, I plan to continue investing through SIPs for five years. I am investing with a time frame of 8-10 years for my daughter. Please review my portfolio and give an estimate of the value of the portfolio 10 years hence. Also suggest some measures to improve the quality of my portfolio.
- Deepak Mehta

First Impression
What's good in your portfolioThe Value Research Portfolio Manager suggests that your current portfolio has an equity exposure of 85 per cent while 7.5 per cent is in debt. Given your time horizon of 8-10 years, an equity heavy portfolio is fine. The investments are also fairly distributed across funds.

What's not
A substantial amount of your money is invested in new funds. Even though a majority of your funds have a five- or four-star rating, the lump sum investments made in the relatively new funds has distorted the overall allocation. Because of this, a substantial 44 per cent of your total investments are concentrated in funds that are not rated by Value Research.

Deepak's Portfolio
Funds  % Allocation
Franklin India Bluechip-D 5.60
Franklin India Flexi Cap-G 5.26
Franklin India Prima Plus-G 5.43
Franklin India Smaller Companies-D 10.74
HDFC Equity-D 9.17
HDFC Long-term Equity-G 14.84
HDFC Prudence-D 8.63
Pru ICICI MIP-G 8.99
Pru ICICI Tax Plan-D 9.34
Reliance Equity-G 8.85
Reliance Vision-D 4.76
Standard Chartered Classic Equity-G 4.69
Sundaram BNP Paribas Select Midcap-G 3.70
Total  100.00


The Road to Revamp
It is better to invest in funds that have been around for some time and have proved their worth rather than investing in brand new offerings. A bit of fine tuning at this end will make your portfolio sound. Dump some
We have eliminated Franklin India Flexi Cap and Reliance Equity. This money has been shifted to the well-established funds of the same fund houses- Franklin India Prima Plus and Reliance Vision (both are present in your portfolio).

We have also transferred the investments from Standard Chartered Classic Equity Fund to HDFC Equity Fund. The former has remained a laggard and you should exit this fund. HDFC Equity, on the contrary, is one of the most suited funds to play a lead role in any equity portfolio. Therefore, it deserves to manage more than its present allocation of less than 10 per cent. By doing these changes, your portfolio would get into better shape. While diversity at the fund house level is retained, the portfolio will now have a higher allocation to long term winners which are more suitable to form the core holdings.

Retain some of the new players
Even though two other new funds- Franklin India Smaller Companies and HDFC Long-term Equity - constitute a significant part of your portfolio, we have still kept them because exiting now will inflict you with heavy loads (apart from capital gains tax). For redemption within the first year, both charge a steep exit load of 4 per cent. Their relative proportion in the portfolio will also come down gradually, as you will continue to invest through SIP in other funds. Tax planning needs fresh look
We have retained your existing allocation to Prudential ICICI Taxplan. This fund happens to be quite aggressive in its investing style, but it has also generated good returns. But depending upon how much you need to invest in an ELSS to save tax, you can consider adding another good ELSS fund to your portfolio. You can opt for one out of those covered in the Fund Focus section of this issue.

Looking Ahead
About the expected value of your portfolio 10 years hence, predicting any figure will purely be speculation. All we can say is that given the performance of your funds, you are likely to do better than the markets at large. Moreover, the risk in equities gets significantly reduced over a long term horizon, while their potential to generate returns remains intact. Therefore, keep investing regularly without worrying too much right now.

Suggested Portfolio
Funds  % Allocation
Franklin India Bluechip-D 5.60
Franklin India Prima Plus-G 10.69
Franklin India Smaller Companies-D 10.74
HDFC Equity-D 13.86
HDFC Long-term Equity-G 14.84
HDFC Prudence-D 8.63
Pru ICICI MIP-G 8.99
Pru ICICI Tax Plan-D 9.34
Reliance Vision-D 13.61
Sundaram BNP Select Midcap-G 3.70
Total  100.00