Portfolio Makeover | Value Research I am 54 and will retire in four years. I have been consistently investing in mutual funds for the past 10 years. My current portfolio is worth Rs 10 lakh. I can hold on to these
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Portfolio Makeover

I am 54 and will retire in four years. I have been consistently investing in mutual funds for the past 10 years. My current portfolio is worth Rs 10 lakh. I can hold on to these

I am 54 and will retire in four years. I have been consistently investing in mutual funds for the past 10 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 expect 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

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.

Hemant's Portfolio
Funds  % Allocation
Franklin FMCG-D 11.60
Franklin India Bluechip-D 6.69
Franklin India Flexi Cap-D 2.17
Franklin India Flexi Cap-G 4.06
Franklin India Prima Plus-D 2.98
Franklin India Prima-D 3.57
Franklin India Prima-G 2.64
HDFC Capital Builder-G 2.00
HDFC Equity-D 6.06
HDFC Equity-G 2.46
HDFC Growth-G 3.70
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 2.13
UTI Auto Sector-D 6.15
UTI Banking Sector-D 5.61
UTI Dynamic Equity-D 1.17
UTI Infrastructure-D 5.54
UTI Mastershare-G 3.74
UTI Mid Cap-D 3.76
UTI Opportunities-D 2.88
Sub Total  84.89
Franklin India Taxshield-G 3.38
HDFC LT Advantage Fund-G 3.36
HDFC Taxsaver-G 2.72
Pru ICICI Tax Plan-G 1.02
Templeton India Pension Plan-G 3.33
UTI Retirement Benefit Pension 1.30
Sub Total  15.11
Total  100

Such funds can be easily avoided. The purpose of a sector fund is to supplement your core portfolio with a concentrated exposure. It is better to invest in a diversified equity fund rather than holding a bouquet of diverse sector funds. Also, it makes more 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 options of the same fund and have increased 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 those 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 available core funds present in your portfolio.

We have 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 tax incentives, 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 exposure to Franklin India Prima and HDFC Capital Builder.

With these amendments, the number of funds in your portfolio 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 two mid-cap funds with Sundaram Select Midcap and Birla Mid Cap.

As far as 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 for you). 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. As you start offloading your units, channelise the money towards debt-oriented funds and monthly income plans.

You can consider switching over to Templeton India Pension Plan provided you are comfortable with further lock-ins. Another fund worth considering when you start to switch is UTI Variable Investment Scheme. This is an asset allocation fund quite conservative by design. The fund automatically increases debt allocation when markets are high and switches to equity when they have fallen.

What Can You Expect?
With reference to your query on whether your expectations are realistic, it is not wise to have any expectations in terms of monthly returns from an equity fund's portfolio. There are bound to be wide variations in returns on a month-to-month basis. There would be months when you earn a double-digit return as well as months when you incur double-digit losses. 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 from your investments is realistic, but expecting that much in every single month is wishful.

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

Sensible Investments
I am a regular investor and do not pay any attention to market variations, stock prices and NAVs on regular basis. So far, I have also kept under control the temptation of investing in a new fund (except for HDFC Core and Satellite). I invest Rs 14,000 per month in nine funds through SIP. My primary aim is to build an asset base of around Rs 50 to 60 lakh in the next eight years. Is it achievable? Is my selection of funds appropriate? What changes would increase the chances of achieving my goal?
- Alpana Dhole

Before we analyse your portfolio, let's evaluate the feasibility of your target. To earn Rs 50 lakh through a monthly investment of Rs 14,000, your funds should generate 27.92 per cent every year. This is probably too ambitious. However, you can enhance your chances of earning Rs 50 lakh in the near future by two different approaches. Before explaining that, let's first see what should be your expectations from funds. Long-term investors should expect 13 to 15 per cent annualised returns. Though it's still a guess, 15 per cent definitely looks a much more realistic assumption. It is better to be a little conservative while making returns estimations, so that you don't end up with disappointment later.

Alpana's Portfolio
Funds  % Allocation
Franklin India Bluechip 14.28
Franklin India Prima 28.55
Franklin India Taxshield 7.18
HDFC Capital Builder 7.14
HDFC Core & Satellite 7.14
HDFC Prudence 14.29
HDFC Taxsaver 7.14
HDFC Top 200 7.14
Reliance Growth 7.14
Total  100.00

Moving to the issue of your targeted amount, you can achieve it either by investing more or by increasing the time period of your investments. If your current investment of Rs 14,000 grows at 15 per cent per annum, it would take you nearly 12 years to earn Rs 50 lakh. However, if you increase you investment to about Rs 27,000 per month, you can achieve your target in eight years. If both the options look unrealistic, you can opt a middle path. Relax the number of years that you wish to invest and keep raising your SIP amount.

Now let's get back to your portfolio. Over 93 per cent of your assets are in equities, 3 per cent in debt (coming from HDFC Prudence) and the rest in cash. Majority of the funds have earned five or four star ratings from Value Research. Mid- and smaller companies have a dominance with an allocation of 54 per cent. Overall, your portfolio looks in shape given your long term investment horizon and expectation of high return. However, your equity-centric portfolio will definitely test your resolve at some point as it's bound to go through volatile phases. Still, don't lose patience and keep doing what you are doing right now.

The only concern is that your assets are concentrated in two asset management companies (AMCs). But both Franklin and HDFC are quality AMCs and therefore deserve your faith.

Going forward, stick to your current portfolio and avoid the temptation of adding more funds to it. At present, the portfolio looks healthy and complete as per your needs. Decide to make changes to the portfolio only if any of your funds turns a laggard.

Finally, you have done well to ignore new funds. Why entrust your money to funds which are yet to prove their worth, when you have some solid and well-established options available? Your youngest fund (HDFC Core and Satellite) has done reasonably well so far. However, it's still too early for us to comment on it.

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