Too Many Holdings
I retired recently and seek your advice on my portfolio. I have residential properties for personal living as well as rental income, which account for 67 per cent of my net worth. My regular living expenses are met from pension and rental income. My children are well settled and do not need my support. My mutual fund investments are intended for long-term with a time horizon of more than 10 years. I have also set-up an account with a PMS. I made 30 per cent of my fund investments on May 10. I have been thinking of adding balanced funds in the light of the May crash.
- Bish Mukherjee
It is quite unfortunate for you to have invested a chunk of your money on the day when the markets were at their highest levels. But do not worry. As long as you have time by your side, your losses are likely to be only temporary. But make it a point to route your equity investments through the systematic investment plan route from now on.
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Coming to your portfolio, we do feel there is scope for changes. First, let us identify the problems. The most prominent problem is the presence of too many small holdings. Most of your fund holdings are so small that good performance of any of them will have a negligible impact on your overall portfolio. This achieves little except making things complex and difficult to track. Therefore, one of the tasks at hand is of consolidation.
Another problem is that your portfolio is full of new funds (58 per cent of your money is invested in the funds which are not yet rated by Value Research). And some of these have a very narrow objective of investing in a particular sector or theme and can best play a tactical role in the portfolio. You can easily do without both of them.
Even among the older funds, more aggressive and racy funds account for a larger share while the ones that should be at the core of a portfolio have thin presence. Therefore, the task at hand is to increase the weight of the core funds which have excellent long-term record and consolidate the portfolio by reducing the number of funds.
At this instance, we would like to mention that your current portfolio has been dividend into two parts - Part I comprises investment in open-end equity funds, while Part II constitutes tax-planning and close-end funds. Let us start with Part II.
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Since your investments in the tax-planning funds will be locked for the time being, there is little that can be done. But over the period of time, you can consolidate it into two funds (see the suggested portfolio). We have allocated 15 per cent to them, same as the present weight of tax-planning funds, but you can increase or decrease it as per your tax considerations.
That leaves HDFC Long Term Equity Fund in Part II. While we feel 12 per cent is a far too high allocation to it, but you should still stick to it for the time being as there is no point paying a steep load of 4 per cent by redeeming it right now. If in future, this fund disappoints, shift this money to HDFC Equity. And for the fresh investments from here on, replace this fund with HDFC Equity so that gradually its proportion comes down.
Coming to the large and fragmented Part I, we have retained few of your holdings as all the new untested funds have paved the way for some of the most dependable funds available today. We have also removed the racy funds from our suggested portfolio and it is not difficult to explain the reasons for the same in the aftermath of the May collapse. Just compare their performance with the category over the last couple of months to get a sense of their volatile nature. We believe you can earn good returns with more stability with the funds that we have put in.
Your decision to add a balanced fund seems quite prudent. A little bit of debt component will only enhance the stability. Moreover, this could be the investment that you may consider redeeming in future when you need some money, as you have mentioned. The recommended portfolio comprises funds with a 'go-anywhere' approach. This will minimize the need for you to take decisions actively. You will have to act yourself only if any of these funds' performance turns dud. The decisions regarding sectors and stocks can be left entirely to the fund managers. This would not be possible with your present portfolio which includes some of the narrowly defined funds.
Since you also have a PMS, we suggest you to try and balance out your fund and PMS investments. We believe that a lion's share of your equity investments should go to mutual funds and that is why we have toned down the aggression of your MF portfolio by increasing the weight of more stable large-cap oriented funds.
Maybe you can afford to be a little more adventurous with your PMS portfolio, if you so desire.
Avoid New Funds
I have been investing in stocks for the past 35 years and earned handsome returns. Now I am 72, and have started investing in mutual funds too. So far, I have bought 49 funds with the sole aim of maximising returns. I am not dependent on my investments for day-to-day expenses and willing to stay invested for more than five years or so if need be. Is there a need to restructure my portfolio to maximise gains.
- Thakorbhai L Vashi
Value Research Portfolio Manager suggests that equities account for 93 per cent of your portfolio spread over 49 funds across 14 AMCs. That, we feel, is far too much of diversification. Nearly half of your funds are less than three-year old and hence are still to come under the ambit of Value Research rating. Large-cap stocks dominate your portfolio with over 51 per cent exposure, followed by 40 per cent in mid-and small-cap stocks.
We see two major problems in your portfolio. First is the quality of funds. You seem to have invested in every new fund that has come your way. At Value Research, we feel new funds do not make sense given their high cost and lack of track record. Among your older funds, you could have avoided below three-star rated funds and the sector funds.
The second problem is, of course, the number. We don't understand why you need 49 funds? One also buys mutual fund for convenience but you are completely missing out on this advantage. In fact, you have made your portfolio so complex that it's tough to get a clear picture out of it. You have several funds of same style with similar portfolio leading to high level of duplication.
Your portfolio needs major restructuring to clear the mess. However, with so many new funds, the process is not going to be easy as exiting new funds would mean paying loads and capital gains tax in many cases. One way out could be dividing your portfolio in two parts - Part I for the rated and more than three-year-old sector funds; and Part II for new funds (see your portfolio chart).
You can start restructuring Part I by quitting the sector funds. No one probably needs a sector fund. Further, you can consider consolidating your portfolio in five or four star funds.
We found something interesting about your portfolio while looking for ways to reduce the number of funds. If you invest all your money in the five-star funds in equal proportion you will end up with almost the same portfolio, as far as capitalisation is concerned, as you have with 49 funds. Therefore, this can be one way to approach the restructuring.
Dealing with Part II is tricky and time consuming. Here as well, you can first consider exiting the sector-specific funds, unless you have a lot of conviction in a particular sector and would like to retain a fund specific to it. Next, you will have to gradually exit a lot of these funds. We suggest you to follow a low tolerance approach towards underperformers in this group.
Throw out the laggards and channel the proceeds to five-star members of Part I. While doing so, keep exit load and tax issues in mind. Over a period of time, try and bring the number of holdings down to 12-13 funds, which should be enough to serve your purpose.
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This article was originally published on September 01, 2006.
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