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| Go slow on themes |
| BS Research / New Delhi Oct 25, 2009, 00:09 IST |
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I have been a regular investor in mutual funds for the past 3-4 years. I have accumulated many funds in my portfolio which were at some time or the other very good funds, but not all are rated 4- or 5-stars today. Should I exit funds as soon as they go below the top ratings? I think this will mean too much of churning in my portfolio.
I do not need the money invested in these mutual funds for another 10 years. The money in debt funds is also to be shifted to equity funds. Additionally, I plan to invest Rs 25,000 per month via systematic investment plans (SIP).
-P C Huddar
At the onset, let us tell you that your investment approach is spot on. As we have advocated many times, investments in equity should be made with the long-term perspective in mind. It's good to see that you have dedicated a 10-year time frame for your investments.
However, even with such an adequate time period, equity investments work best when the entire portfolio is in conjunction and stable. Here are a few pointers on how a decent return-generating portfolio is built:
Portfolio's Core: Diversified Equity Funds
These funds diversify across sectors and companies. Diversification is important to rule out over-dependence on any particular sector or company.
Thematic Funds: Limited Exposure
Thematic funds are generally aggressive in nature. Since these are concentrated on one sector, they tend to invest in small- and mid-cap companies. And such funds do well only when its sector is doing well. While these funds help generate higher returns, most portfolios can do without them, since a diversified equity fund will anyway have exposure to a hot sector.
Debt: Cushion for Equity
A certain debt component helps limit the portfolio volatility. The extremities of market movements will be contained, thereby adding more stability.
Rebalancing: Maintaining the Debt-Equity Ratio
Debt component in the portfolio gives an investor a sense of security by way of regular income, while equity provides capital appreciation. It is important to decide the allocation between the two. A single asset class might rise or fall more than the other and disturb the decided allocation. Hence, regular rebalancing of the portfolio must be done to achieve the maximum benefit.
Now, let us see how far you are from the ideal path.
High Allocation to Aggressive Funds:
A look at the 'Fund Categorisation' table reveals the first blockade - allocation to the aggressive/thematic funds is close to 50 per cent, which reflects that you have a high risk appetite. But, these funds also bring more volatility to the portfolio. This is unhealthy for long-term capital building.
Too Many Funds: With 37 funds, your portfolio seems a mess. Three to five diversified equity funds can very well give you all the diversification that one can need.
Duplication of Investing Style: Too many similar funds results in an overlap of investing style. For example, two funds that you hold, Tata Infrastructure and DSPBR T.I.G.E.R., both track the same theme and you can do with just one of them. The same can be done for the two mid-cap funds and three opportunities funds in your portfolio.
Debt Allocation: The allocation to income funds in this portfolio is close to 20 per cent, which we think is good enough for the time frame you have chosen. However, you should see this allocation in conjunction to your other investments meant for a single purpose or invested for a similar time frame.
Reviewing Funds: The rating given by Value Research is not only based on the fund's standalone performance, but also compared to other funds in the category. Hence, a fund going down in rating does not always imply the fund's performance is going down, but also that its peers are performing better.
Hence, churning the portfolio due to falling ratings is not advisable. One should rather monitor the performance of these funds and exit these if they continue to perform poorly.
Coming to your second query, here are a few good funds that you can invest Rs.25,000 per month in via SIPs.
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