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Portfolio Makeover

The portfolio is well diversified & looks fine for the long-term. Though there is scope for improvement

Built to Last
I want to create two portfolios of Rs 10 lakh each for my sons and distribute the money among six funds. I have no liabilities and sufficient liquidity. I can stay invested for the next at least 10 years. If it's a bear market, my sons can wait. Both of them are well-settled and do not require money out of these portfolios. Is it reasonable to expect an annualised return of 21.50 per cent? I intend to shift the returns generated in excess of 25 per cent by Franklin Prima, Magnum Contra and Reliance Growth to HDFC Prudence every year
- J P Dixit

Value Research Po-rtfolio Manager suggests that 85 per cent of your assets is allocated to equities, 11.51 per cent to debt and the rest is in cash. Large-cap stocks account for 52.16 per cent of the portfolio, followed by 45.56 per cent allocation to mid- and small-cap stocks. None of your funds are rated below four stars. At sector and stock levels, you have achieved a good diversification, with no one sector or stock accounting for over 15 per cent and 5 per cent of the total assets, respectively. You have selected some of the finest funds and ready to wait for the long-term. Your returns expectations are high but not unrealistic. Finally, you seem to recognise that mid-cap funds could be risky and are therefore willing to shift part of their gains to relatively safer balanced funds. These are sound strategies. If you continue to follow this approach you stand a good chance to achieve your goals. If you get the desired return, your Rs 10 lakh portfolio will be worth nearly Rs 58.50 lakh at the end of 10 years.

JP Dixit's Portfolio
Fund  % Allocation
Franklin India Prima 10
HDFC Equity 20
HDFC Prudence 30
HDFC Top 200 15
Magnum Contra 15
Reliance Growth 10
Total  100


Your portfolio looks fine for the long-term. Even if you continue with the selected funds, you are likely to achieve good results. However, there's always a scope for improvement and your portfolio is no exception.

We have created another portfolio for you (see chart Suggested Portfolio). We have dropped HDFC Prudence, the top holding as per your selection. The rational is that you are looking to stay invested for at least the next 10 years and hence can start with an all-equity portfolio. Why settle for 11 per cent debt if you stand the chance of achieving better results? HDFC Prudence is the best fund in its category and would play a role in your portfolio, but not now. Once you get nearer to your goal, attempt should be to gradually shift money to relatively safer balanced funds. But for now, it is fine to let equity funds manage all your money.

Next, you may find exclusion of Franklin India Prima and Reliance Growth surprising. After all, they have been one of the hottest funds around. But this we have done for two basic reasons. First, we wanted to cut your overall mid-/small-cap exposure. At a little over 45 per cent, they have too much representation at the moment. Second, the funds have grown too big and therefore have imposed restrictions on fresh investments - while only SIP investments are allowed in Prima, Reliance Growth won't take investments of more than Rs 5 lakh. While we still reckon the two as good funds, we have opted for a smaller five-star mid-cap fund, Sundaram Select Midcap. However, you can easily opt for any of the two funds or both.

Suggested Portfolio
Fund  % Allocation
DSPML Opportunities 10
Franklin India Prima Plus 15
HDFC Equity 25
Magnum Contra 15
Reliance Vision 25
Sundaram Select Midcap 10
Total  100


The proposed list of funds will add another dimension to your portfolio. In your existing selection, HDFC funds account for 65 per cent of the assets. Nothing wrong in it as your money will be invested across three good funds, but one should avoid this level of concentration in one AMC. The new portfolio will automatically resolve this issue and achieve diversification across six AMCs and managers. Blend funds like HDFC Equity, Reliance Growth and Franklin India Prima Plus would lead your portfolio, while Magnum Contra could be your tactical position. Additionally, the mid- and small-cap allocation will come down.

The Long Run
I am a 30-year married man. My current investment of Rs 1 lakh is spread over nine funds. My financial goals are to provide an estimated Rs 15 lakh for my daughter's education about 15 years from now, perhaps about Rs 10 lakh for her marriage after 20 years and Rs 50 lakh for my retirement after 30 years. For these, I plan to invest Rs 1,00,000 in the first year and increase the investment amount by 20 per cent each year. For this, I have altered my portfolio. Am I on track?
-Sachin

If you really do manage to stick to your goal of starting with an annual investment of Rs 1 lakh and increase this by 20 per cent every year, you probably don't need to invest in a fund to achieve your targets. In fact even your savings bank account will earn much more than what you are aiming for. Even if you want to achieve all your targets at the end of 15 years, it's possible through your savings bank account. Of course, the fly in the ointment, as it is in all such calculations, is inflation. With a 6 per cent inflation, what looks like 15 lakh today will be close to Rs 36 lakh in 15 years. And by the time you retire, whatever can be bought with Rs 50 lakh today will need Rs 2.8 crore. By the way, in recent years the cost of professional education has risen at around 10 per cent per annum. If one factors in a 6 per cent inflation rate into your targets, you'll need Rs 36 lakh in 15 years, another Rs 32 lakh in 20 years, and Rs 2.87 crore in 30 years.

Sachin's Portfolio
Fund  % Allocation
Fidelity Equity 10
Franklin India Prima 10
HDFC Capital Builder 10
HDFC LT Advantage Fund 20
Kotak Mid-Cap 10
Pru ICICI Dynamic 10
Reliance Equity Opportunities 10
Sundaram Select Midcap 10
Tata Pure Equity 10
Total  100


However, increasing your savings by 20 per cent a year for 30 years will be a tough act. If you make the calculation, you'll discover that this leads to a situation where you would actually have invested Rs 11 crore over 30 years. It's that old magic of compounding at work here, though not in a way that you'd like. Let's get a little realistic and restate your problem. Let's assume that over the long term, you'll get about 15 per cent returns from the market. Let's figure out that if these were the returns, then how much would your savings have to increase in order for you to reach the inflation-enhanced targets. It turns out that an increase of just 5 to 6 per cent every year in the amount you invest should be enough. Practically speaking, you should try and better than that in the early years to let the magic of compounding do some extra work, but this is a reasonable goal.

Now, let's get back to your existing portfolio. As per the Value Research Portfolio Manager, 93.64 per cent of your assets is invested in equities, 0.50 in debt and the rest is cash. Mid- and small-cap stocks constitute 62 per cent of your investments, while nearly 37 per cent is invested in large-cap stocks. Overall, your portfolio looks in shape given your long-term investment horizon.

Your planned portfolio looks much better. All the constituents have good performance track record. However, we suggest you lay greater stress on funds like HDFC Equity and Reliance Vision, as they have the flexibility to move between large- and mid-cap stocks.

Sachin's Portfolio
Fund  % Allocation
Franklin India Prima 20
HDFC Capital Builder 10
HDFC Equity 15
HDFC LT Advantage Fund 10
HDFC Prudence 20
Reliance Vision 15
Sundaram Select Midcap 10
Total  100


We believe you are on track. If you continue to invest as methodically as you are doing now, you can achieve much better results than what you are aiming for at present. Our final suggestion to you will be maintaining three separate portfolios for your goals: for daughter's education, her marriage and your retirement. This is because you will need the money at different points of time, and probably have different risk-reward requirements for each goal. For instance, the investment for your daughter's education is long-term now but you can't afford to take huge risk once the goal nears. Therefore, allocate you proposed annual investment proportionately to the three portfolios. You can start with all-equity portfolios. But as you approach your goals, shift the money to debt funds.