I am 42 years old and have adequate life insurance in place. I also have a disposable income of Rs 50,000 per month. I do not have any liabilities. I have invested Rs 24 lakh in mutual funds. All investments so far have been in lump sum. Presently, I do not have any regular Systematic Investment Plan (SIP) in any fund but I want to start it.
I am willing to accept an aggressive approach for higher returns. I am looking for long-term gains and am comfortable investing for around 5 years.
Please take a look at my portfolio and suggest which funds I should hold and which ones I should exit. Should I add any other funds to my portfolio? In which funds should I start an SIP?
-Girish Arora
Since we are clueless with regard to your other investments, will focus solely on your mutual fund portfolio, which comprises of 23 funds. The dates of investment give the impression that you have never invested in mutual fund before, barring an investment made last year. So, either you are a new investor or it could imply that you had invested earlier and sold off your holdings.
Since your focus is clearly on equity with a five-year time frame and the willingness to take a risk, let’s move on to analysing your equity portfolio.
Observations on the Portfolio
Tax Planning: There are five tax saving funds in your portfolio, which you bought in a span of two days. If you were keen on using the entire benefit under Section 80C of the Income Tax Act, you could have managed with just two funds.
Thematic Investments: You have four thematic funds focusing on infrastructure. A quarter of your portfolio is tilted towards the infrastructure theme, with one of them being your largest holding.
Over-Diversification: Simply adding more funds to your portfolio does not imply that it is well diversified.
The road ahead
In the portfolio we have suggested, there are 16 alternatives from 11 fund houses. Limit your exposure to a fund house to just one of its schemes, or a maximum two if it cannot be helped. Once you select your portfolio, be prepared to start offloading the rest gradually.
You have no choice but to stay on with the tax-saving funds till the mandatory three-year lock-in period is complete.
If you sell your equity funds within a year of holding, you will have to pay short-term capital gains (STCG) tax. If you sell after a year, your long-term capital gains (LTCG) tax is nil. In all cases, you will have to check if there is an exit load levied after a year.
Further investments must be made via SIPs. This brings about discipline and consistency. Also, averages the cost of purchase.
Build a Smart Portfolio
Diversify: We always advocate diversification, within fund houses and types of schemes. But, too many funds are a waste of resources and energy. With 23 funds, you have a tedious task managing and tracking this portfolio. Moreover, it nullifies the impact of each. Diversification can be achieved with fewer funds, which will make your portfolio simpler and easier to manage. To achieve right diversification, a portfolio can have 5-8 funds.
Have a strong core: The core part of your portfolio must be funds which have a large-cap tilt and proven track records. No thematic or sector funds should find themselves in this spot. You can go with five funds which form the bulk of your investment and corner around 70 per cent of your portfolio.You can even include your ELSS in this category. The core as well as your other investments should be in funds with proven track record only. Don’t fall for new funds that have attractive themes or are pushed by a distributor.
Add supporting funds: These funds should be selected once your core holdings are in place. The sector/thematic/ mid- and small-cap funds that feature here can account for around 20 per cent of the portfolio. A debt fund can also be added. We would normally suggest an allocation of 20 per cent to debt; however, in this instance, we will go with 10 per cent. For one, we are assuming you have all your other investments in fixed return and you seem comfortable with taking the risk associated with equity.
