We have no issues with the quality and quantity of your funds. About 55 per cent of your portfolio is invested in well performing 5-star rated funds and having eight funds for a portfolio of Rs 6.76 lakh, both make good sense. However, we feel that your portfolio is a bit too high on aggression and we have suggestions to alter the same.
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LEARNING THE BASICS
Your portfolio comprises of funds, which would do extremely well in a bull run, but would crash in a bear phase. This is largely because of the various well performing mid-cap funds that you hold, as they tend to be more aggressive than large-caps.
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| There is no harm if the portfolio comprises of such funds/stocks, but the portfolio should not be heavily skewed towards them. As on April 17, 2008, the mid-and small-cap exposure of your portfolio stood at an alarming 56 per cent, whereas large-caps accounted for 39.72 per cent. It is very important that your portfolio has funds to provide stability and reduce the downside risk of the portfolio.
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CRASH PERFORMANCE
Your portfolio was quite badly hit in the recent market crash. We calculated the value of the portfolio on January 4, 2008 (assuming you held the same number of units). The portfolio value has fallen by 30 per cent from Rs 9.4 lakh to Rs 6.5 lakh in the period January 4 to April 17, 2008, a time when the Sensex dipped by just 20 per cent.
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The Sensex movement gives a broad indication as to how the large-caps proved to be more stable. Hence, a mid- and small- cap heavy portfolio is bound to be hit in a struggling market.
| SUGGESTED FUNDS | | SIP Portfolio | SIP Amount
(INR) | Large Cap Exposure*
(Approx) | | Sundaram Select Focus | 15,000 | 86% | | Kotak 30 | 15,000 | 83% | | DSP ML Top 100 | 15,000 | 83% | | Birla Dynamic Bond Retail | 15,000 |
Debt Fund | | Total | 60,000 | | | * As per March 2008 Portfolios |
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CORRECTING THE FLAWS
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We noticed that there was no regularity in investments (except for the two SIPs). For instance, there was no investment for almost 10 months in 2007. Timing the markets is something you shouldn't try. Going ahead, avoid lump sum investments and just stick to the SIP route to average the cost of purchase over time.
Something you need to rectify is the high mid-and small-cap exposure. The allocation can be adjusted gradually, if you initiate SIPs in well rated large-cap oriented funds.
A portfolio needs to be well-diversified across funds and even fund houses. Such diversification would help you benefit from different strategies that each AMC adopts.About 38 per cent of your portfolio solely comprises of Reliance mutual funds. Ensure that your portfolio is not dependant on a particular fund house.
Your portfolio has a negligible debt component of 0.97 per cent. Debt is essential, as it helps protect your portfolio from the downside. A 10 per cent exposure to a debt fund would make the portfolio look healthier. As you are initiating fresh SIPs you can route some amount to a rated debt fund.
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PLAN OF ACTION
As the portfolio is heavy on mid-caps, it would be ideal to discontinue SIPs in Sundaram Select Mid-cap and Magnum Global, as planned by you. Though HDFC Top 200 is a large cap fund and an ideal pick, we opted for a debt fund instead. We have selected all large-cap heavy funds which would help in transforming your portfolio.
| EXISTING PORTFOLIO | | Fund |
(%) Allocation | | DSPML T.I.G.E.R | 5.75 | | HDFC Top 200 | 17.05 | | JM Basic | 5.95 | | Magnum Global | 15.08 | | Reliance Growth | 14.24 | | Reliance NRI Equity | 17.62 | | Reliance Vision | 6.06 | Sundaram BNP Paribas
Select Midcap | 18.26 | | Total | 94.26 |
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| We stayed away from DSP ML Tiger and JM Basic as these are aggressive funds. Both Kotak Opportunities and Magnum Contra can be skipped as they have relatively high mid-and small-cap exposure.
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| Other Reliance funds you opted were completely avoided (though they are well rated consistent performers) because you already have significant portfolio exposure to them.
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| Another thing you need to take note of is the fund count. We recommend you to exit from aggressive funds like JM Basic and DSP ML Tiger once the markets recover a bit. This would reduce the fund count to 10. Make sure you do not add more funds to the portfolio. We believe these are quality funds which can take care of your investments in the long run. Start investing in these funds via SIP.
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| Keep in mind that rebalancing the portfolio at least once a year is very essential. The equity-debt allocation might swing widely even in a bull or a bear phase. Keep a check on this and rebalance the portfolio, as and when required.
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ACHIEVING GOALS
If you continue to invest Rs 60,000 per month for the coming 17 years, you would be able to create a corpus exceeding Rs 5 crore (assuming a 15 per cent a year return on your portfolio). As you have 17 years by your side, a 10 per cent debt component would suffice.
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| But it's important to have a considerable debt component in the portfolio, few years before you require the money. This would help you in protecting the corpus amount that is created over time. As equities tend to be volatile, start shifting your portfolio gradually to debt around four years before you require the money, to safeguard the created wealth. Good luck
Value Research |
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