| I am 61 years old and currently living in the U.S. I am planning to retire and return to settle down in India after 2015. I request you to please evaluate my investments and advise me on the same. My primary goal is to have a steady income after retirement.
— Shenur Shenoy At first glance, your portfolio looks impressive. With 86 per cent equity and 11 per cent debt exposure, one could say that the portfolio has an ideal debt component to reduce the downside risk. However, this equation changes when we look at the high exposure to small cap stocks.
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| With around 34 per cent of the portfolio invested in small cap stocks (most of them your direct stock holdings), the risk reduced by the debt component is neutralised. Hence, your portfolio is quite high on risk.
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| We also noticed that your portfolio lacks quality fund picks which are essential for any portfolio's stability. Most funds selected by you are less than a year old. We are not saying that these funds would not generate returns in the long run, but there are better and proven options available.
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| You could have opted for well rated existing funds which have a good performance history. As new funds have no track record, it is tough to evaluate them. Plus they have associated high initial costs.
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| What is worse is that one of the new funds that you picked –
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| HDFC Long Term Equity - is a close-ended fund and has been a poor performer till date. It has a three year lock-in and exiting before that would involve high costs.
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| On the other hand, the DSPML Gold fund does add a unique diversification to your portfolio as the fund invests in international gold mining companies. Undoutedly, the fund has performed reasonably well since its launch. But being a new offering, you must review its performance once in six months.
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REJIG YOUR PORTFOLIO
Since you are a recent fund investor, you should correct your mistakes and devise a strategy. Going ahead, make it a rule to avoid lump sum investing and try to be systematic.
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| The recent market crash makes it clear how risky the stock market can be at times. Most equity diversified mutual funds eroded around 20 per cent of their NAVs when the markets tanked heavily.
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| An investor who did a lump sum investment just before the crash would be deep in losses by now and panicking. But an investor who would have his SIP (systematic investment plan) running throughout the month would be able to benefit from cost averaging.
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| To begin, you need to invest in some good diversified funds which have proven their worth till date. We suggest that you exit from SBI Bluechip and Reliance Equity Advantage.
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| The reason being that they are open ended (so have low exit charges) and have not performed well during their existence. We included Reliance Vision and Birla Frontline Equity, both well performing funds.
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| As you wish to invest in an infrastructure fund as well, we selected DSP ML TIGER. Make sure you invest monthly (via SIP) in these funds.
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DEBT COMPONENT
As your aim is to create a retirement corpus, try to maintain a debt component in the range of 15-20 per cent. This will give your portfolio a healthy look. For this you can include some 5-star rated debt funds like Kotak Flexi Debt or ICICI Prudential Long Term.
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| You will be surprised to know that your investment in Franklin Templeton Capital Safety 3 Year Plan, which is a 3-year close ended debt fund, has already doubled. You can sell the units on the National Stock Exchange and invest the proceeds in any of the 5-star rated debt funds listed above.
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REDUCE SMALL/MID CAPS
You seriously need to work on reducing the small cap exposure as almost half of your portfolio consists of mid- and small-cap stocks. Such stocks are certainly more rewarding at times but they also have a higher associated risk when compared to large-cap stocks.
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| Ideally, you should construct a portfolio which is large-cap oriented. Once you start investing in the above mentioned funds, you will gradually build a large-cap oriented portfolio.
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| Another alternative is that you can reduce direct exposure to equity. If you are not in a position to research and keep track of direct investments in stocks, it is better to stick to the mutual fund route for investing.
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| Another aspect that needs to be addressed is the high portfolio exposure to the metal sector (33.38 per cent) which makes the portfolio largely dependent on the performance of this single sector. This has a negative impact on your portfolio because it hurts your ability to take advantage of the other sector.
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| Reducing exposure to metal stocks like Kirloskar Ferrous Industries (it accounts for 20.44 per cent of your portfolio) and simultaneously increasing exposure to well diversified equity funds will help you correct this skew.
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| Going ahead, increase exposure to funds systematically and opt for good funds. By using this strategy you can create a huge corpus for your retirement.
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| Few years before retirement, begin to shift your investments to pure debt funds. This will help you to make sure that you have increased safety. Surely, when you are coming close to retirement, it is completely unadvisable to exposure you corpus to any kind of stock market risks.
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| This strategy will help you to generate safe but low returns. Then you can redeem the entire amount, invest it in a secured deposit and earn a regular income. |
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