Shun Ulips and trim funds

PORTFOLIOMAKEOVER

I am 35 years old and have been an active investor since December 2006. I am married and have a nine-year-old daughter and a six-year-old son. I want to cater to their requirements, especially my children's higher education and marriages. At present, my wife and I save about Rs 35,000 a month. Besides the investments mentioned alongside, we have also invested in fixed deposits and traditional insurance plans. Kindly review my portfolio? 
                                                                                                                                                                                                                 -Adit Gupta, Jammu

There are some good things about your portfolio and some bad ones. But that's no reason for you to worry because in your case, the good things outweigh the bad ones.

 

The first good thing is that out of the Rs 35,000 you invest every month, Rs 16,000 is invested in mutual funds via systematic investment plans (SIPs). Further, you have also invested in fixed deposit schemes and traditional plans. But you have invested in Ulips as well. You would be well advised to shun Ulips for investment purposes. Especially, in your case, because your investment needs are being take care of by mutual funds and your insurance cover is taken care of by term insurance plans.

Now, before we move to what you should ideally do, let's get a deeper understanding of how investment in Ulips eats away your money. The premium you pay has three components. One is the expenses, which include the commission earned by the agents as well as other expenses and distribution costs. The second is the mortality premium and only the balance is invested. In your case, you paid a total premium of Rs 4,50,000 in the first year for four policies. Of this, the total chargeable expense amounted to Rs 97,845.

A better alternative for you would be to opt for mutual fund schemes from fund houses like Birla Sun Life and Reliance Mutual Fund, which provide insurance cover on investments routed through SIPs. Birla Sun Life Mutual Fund gives a life insurance cover of up to 100 times (maximum Rs 20 lakh) of the SIP amount you invest for three years or more. On the other hand, Reliance Mutual Fund pays the remaining SIP instalments in the unfortunate death of the investor and the nominee can redeem the investment once the SIP tenure gets over.

Review of your mutual fund portfolio: Now moving further to review your mutual fund portfolio, almost 84 per cent of your asset is allocated to equities, 2.28 per cent in debt and rest in cash. Large-cap stocks account for 47.15 per cent of the portfolio, followed by 52.85 per cent allocation to mid- and small-caps. About 60 per cent of your funds are of superior quality with five- or four-star ratings. However, your sector allocation break-up shows a slightly higher exposure to the financial services sector (16.83 per cent), which is not really a big issue. The cause of concern in your mutual fund portfolio is the excessive number of funds, which is leading to over-diversification. The break-up of stocks shows that the highest allocation is in Reliance Industries accounting for only 4.10 per cent and the stock count shows that your portfolio is spread across 280-odd stocks, whereas investment in 90 per cent of the stocks is below 1 per cent.

Suggestions: You have six sector funds where 25 per cent of the investment is allocated. Exposure in sector funds should be limited to 5 to 10 per cent of the total investment. So, we would advise you to come out of the sector funds like JM Basic, JM Financial Service Sector Fund, Sundaram BNP Paribas Energy Opportunities and Reliance Diversified Power Sector Fund. Furthermore, keep any one fund from Tata Infrastructure and DSPML T.I.G.E.R as both the funds focus on the infrastructure sector.

The next move that you need to take is to increase the large-cap allocation. In your portfolio, as of now, there are six large-cap funds accounting for 37.39 per cent of the total investment and four mid-cap funds accounting for 35 per cent of the total investment. Thus, the portfolio is risky and volatile due to its heavy tilt towards mid- and small-cap stocks. Ideally, two to three large-cap funds and one to two mid-cap funds can give adequate diversification to the portfolio. For large-cap funds, you can stay invested in any three funds out of Kotak 30, DSPML Top 100 Equity, Fidelity Equity, HDFC Top 200 and HSBC Equity. You can also invest in Birla Sun Life Frontline Equity and avail the insurance cover benefit from the same. For mid-cap funds, you can stay invested in Reliance Growth and avail the insurance cover facility from it as well.

To increase the debt exposure in your portfolio, you can also invest 10-15 per cent in a debt fund like Kotak Flexi Debt Fund. It will balance your portfolio and will even out the fall in the volatile equity market. Also keep investing systematically and rebalance your portfolio once every six months.

Value Research