Too many good funds lead to lower returns

PORTFOLIO MAKEOVER

I am 40 years old and have two dependents, a wife and a 13-year-old daughter. I wish to generate a retirement corpus of nearly Rs 1.5 crore and also a sufficient corpus to provide for my daughter’s marriage and education. I believe that it is good to invest in several well-performing funds as this helps to balance out the fall in funds (fund-of fund concept). Do you think this is the right strategy? Please explain, preferably in an elaborate way.

It’s good that you have chosen well-rated funds in your portfolio, which makes it high on quality. But it is rightly said that excess of anything is bad. Same holds true in your case. With 24 funds, your portfolio looks extremely cluttered.

Your corpus has lost nearly 18 per cent in the last one year compared with the BSE Sensex, a diversified index which lost around 7 per cent over the same period. This signifies that the level of diversification in your portfolio hasn’t paid off well.

OBSERVATIONS

 

Portfolio bloated with 24 funds.

17 of the funds have a marginal allocation of below 5 per cent.

Lump-sum investments made at irregular intervals.

Many schemes with dividend option

Debt allocation amiss.

Of the 340 stocks in the portfolio, 313 have a meagre allocation (below 1 per cent).

MISCONCEPTIONS
Spreading your investment across a multiple fund family gets you varied style, expertise and diversification. But owning too many funds may not be useful and may lead to unnecessary diversification and added paperwork.Your portfolio is invested in 24 funds, which, in turn, is invested in 340 stocks, and only 37 stocks have an allocation of more than 1 per cent.

With too many funds, you are likely be too diversified to gain benefit of a good fund. And to guard a downside, a well-constructed portfolio of 20-30 stocks can get you a meaningful diversification.

CORRECTIONS

Pare you holdings: You can attain the desired level of diversification with a few well-performing funds. Also, this will reduce the paperwork and your portfolio will become much easier to handle. Moreover, you would be able to monitor the performance of each fund closely and could also identify the laggards.

Avoid dividend option: Since you have a long-term objective , a growth plan would be advisable over a dividend plan. As you don’t need dividend, opt for dividend reinvestment option, which can be done with a request and without any tax implication.

Invest Regularly: SIP is the most disciplined way of investing. It has the benefit of the rupee cost averaging and also saves the investor from the burden of timing the market.

Keep you portfolio tilted to large-caps: Large-cap stocks are relatively stable than mid- and small-cap stocks. Hence, it is preferable to have a high large-cap allocation, which will cut down the downside risk in a declining market.

Add debt component: A reasonable debt allocation of 15 to 20 per cent will provide adequate balance to your portfolio and will curtail the downside risk.

Rebalance your portfolio: Rebalance your portfolio once in every year to maintain the pre-determined asset allocation between equity and debt.

GOAL-SEEK
Considering an annual return of 15 per cent on your investment, you need to invest Rs 10,000 a month for the next 20 years to generate a corpus of Rs 1.5 crore.

An increase in the SIP amount will increase the corpus in the same proportion. Thus you can yourself decide how much corpus you will need to provide for your retirement and also for your daughter’s education and marriage expenses and start investing systematically accordingly.

Value Research