Large-cap investment lowers the risk

PORTFOLIO MAKEOVER

I am 39 years old. At present, I am investing Rs 23,500 per month in ten schemes through systematic investment plans (SIPs). I also invest Rs 60,000 every year in Public Provident Fund (PPF). I am looking at this investment from a long-term perspective. My intention is to increase investments by 10 per cent annually and make my portfolio worth Rs 1 crore by 2017 and Rs 4 crore by 2027. Is the size and composition of my current portfolio fit to reach the financial goal?

- Indrani Sharma

The first thing that catches the eye in your portfolio is the choice of funds. Most funds in your portfolio have a good track record, which shows your thoughtful approach to investing, especially as you have invested through an SIP.

 

Let’s look at some calculations taking into account your intention of increasing the monthly SIP amount by 10 per cent every year. You started investing since April 2007. Currently, your monthly SIP is Rs 23,500. We kept on increasing the SIP amount by 10 per cent every year and calculated the return compounding annually at the rate of 10 per cent for the next 10 years ending December 2017. The value of your portfolio comes to around Rs 82 lakh. The similar increase of 10 per cent annually in the monthly SIPs for a decade, after 2017, will make your corpus worth Rs 4.15 crore.

Now that you know that the magic of compounding and rupee-cost averaging can prove very useful over the long term, the only thing required is that you are disciplined and patient through difficult times.

Here are a few suggestions to fine-tune your approach further:

Cut down the number of funds in your portfolio. Though most of the funds are of good quality, but as it is said that excess of everything is bad. Similarly, too many funds lead to over-diversification. For instance, currently your mutual fund portfolio break-up shows 227 stocks, only 11.5 per cent of which have allocation above 1 per cent.

Funds like Tata Infrastructure and JM Financial Services Sector are topping the portfolio in terms of their percentage holding. It is always advisable to have a minimum exposure in a single sector or theme-based funds. The returns of these funds entirely depend upon the performance of the associated sector. When the sector performs well, the fund performance goes up and vice versa.

The high allocation to JM Financial Services Sector Fund has led the financial sector sitting at the top when we did the sector allocation break-up. An allocation of 33 per cent to the sector makes the portfolio very risky. Moreover, when you have such a good quality portfolio, how did this fund manage to have a prominent holding? This year, the banking sector is down by 46.19 per cent (as on October 20) and the fund is down 56.51 per cent, thus becoming the worst-performing fund in its category. So it is advisable to pick a better fund from the category, if you are banking upon the sector.

Out of the ten funds you have invested in, three of them are large-cap-oriented, but only accounts for 24 per cent of the total investment. This, in turn, has resulted in low large-cap allocation in your portfolio, making its performance risky. It is advisable to increase the investment in large-cap funds to expand the large-cap allocation. This makes the portfolio more concentrated.

Lastly, the portfolio lacks adequate debt exposure. Increase the debt to 10–15 per cent. You can do the same by investing in a debt fund with a good track record. Various categories of debt funds are available, out of which some recommendations for you include Kotak Flexi Debt Fund, Birla Sun Life MIP II Savings 5 and DBS Chola MIP and you can choose any of them according to your suitability.

With the combination of your careful and wise approach and our basic principles, you can easily achieve your objective. Don’t panic or be disappointed in the current market fall. Equity investment is meant for the long term. Keep investing systematically and rebalance your portfolio every six months. Wish you all the best.

Value Research