I am 42 years old and have adequate life insurance in place. I also have a disposable income of Rs 50,000 per month. I do not have any liabilities. I have invested Rs 24 lakh in mutual funds. All investments so far have been in lump sums. Presently, I do not have any regular Systematic Investment Plan (SIP) in any fund but I want to start investing in this way. I am willing to accept an aggressive approach for higher returns. I am looking for long term gains and am comfortable investing for around five years. I do not need the money before that. Please take a look at my portfolio and suggest which funds I should hold and which ones I should exit. Should I add any other funds to my portfolio? In which funds should I start SIP?
-Girish Arora
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Since we are clueless about your other investments, we will focus solely on your mutual fund portfolio, which comprises 23 funds.
The dates of investment give the impression that you have never invested in mutual funds before, barring an investment made last year. So either you are a new investor into funds or it could imply that you had invested earlier and sold off your holdings.
It also appears that you came into money suddenly so wanted to invest it right away. Hence the clutter of activity around a particular period.
Since your focus is clearly on equity with a 5-year time frame and the willingness to take a risk, let's move on to analysing your equity portfolio.
Observations on the Portfolio
Tax Planning: What's surprising is the number of equity linked tax saving schemes (ELSS) you have invested in. There are 5 tax saving funds in your portfolio which you bought in a span of 2 days. If you were keen on using the entire benefit under Section 80C of the Income Tax Act, why did you not just invest in 2 funds?
Thematic Investments: You have 4 funds which are thematic in nature, focussing on Infrastructure. The total investment channelized towards them is around 25 per cent. So a quarter of your portfolio is tilted towards the Infrastructure theme with one of them being your largest holding. In addition, you have an ICICI Prudential Services Industries fund too, another thematic holding.
Over Diversification: Your investment pattern indicates that you have a desire to stay diversified and probably employ this as a method to nullify risk. But simply adding to the number does not make it smart diversification. In fact, you have 3 funds from each of these fund houses - Reliance, Birla, DSP BlackRock, Fidelity and HDFC. Though there are a number of funds that can be classified as good in terms of quality, the combination selected does not imply that the overall portfolio mix is smart.
Debt Slant: You do not have a debt fund, which is always advisable. It helps in rebalancing the overall portfolio and giving it some sort of stability. However, we do understand that since we are not aware as to your other investments, it could well be that the bulk of your savings are probably in fixed return instruments.
Insignificant Allocation: Despite having a number of quality picks, they have a negligible share in your portfolio. Of the 23 funds, 20 have an allocation of less than 5 per cent. Should these funds do really well, the small allocations would not add any value to the overall returns.
The Road Ahead
· In the portfolio that we have suggested, we have provided you with 16 alternatives from 11 fund houses. Limit your exposure to a fund house to just one of its schemes, or a maximum two if it cannot be helped.
· Once you select your portfolio, be prepared to start offloading the rest gradually. · You have no choice but to stay on with the tax saving funds till the mandatory 3-year lock-in period is complete.
· If you sell your equity funds within a year of holding, you will have to pay short term capital gains (STCG) tax. If you sell after a year, your long term capital gains (LTCG) tax is nil. In all cases, you will have to check if there is an exit load levied after a year.
· Further investments must be made via SIPs. This brings about discipline and consistency. When you invest fixed amounts regularly, irrespective of the state of market, you end up buying more units when market is down and less when it's up. In this way, your cost of purchase evens out and you benefit over the long term.
Build a Smart Portfolio
Diversify
We always advocate diversification, within fund houses and types of schemes. A concentrated portfolio could well wipe you out. On the other hand, too many funds are a waste of resources and energy. With 23 funds, you have a tedious task managing and tracking this portfolio. Moreover, it nullifies the impact of each. A sufficient level of diversification can be achieved with fewer funds, which will make your portfolio simpler and easier to manage.
So what makes for adequate diversification? Depending on the amount of money an investor has, an ideal portfolio could be between 5 and 8 funds.
Go for proven names
A temptation is to buy into new funds because the investment theme sounds great. Or probably because the distributor or advisor pushed it. Our advice is to stick to the proven funds with a good track record. You have 3 new funds - Fidelity India Value, Fidelity International Opportunities and Reliance Infrastructure. Why invest in untested funds when there are proven counterparts available?
Have a strong core
The core part of your portfolio must be funds which have a large cap tilt and proven track records. No thematic or sector funds should find themselves in this spot. You can go with 5 funds which form the bulk of your investment and corner around 70 per cent of your portfolio. You can even include your ELSS in this category.
Add supporting funds
These funds should be selected once your core holdings are in place. The sector/thematic/ mid- and small-cap funds that feature here can account for around 20 per cent of the portfolio. A debt fund can also be added. We would normally suggest an allocation of 20 per cent to debt, however, in this instance we will go with 10 per cent. For one, we are assuming you have all your other investments in fixed return and you seem comfortable with taking the risk associated with equity.
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