The Hindu Business Line : Fund Talk

I am a retired person of age 66. My asset allocation is as follows: Shares - 13 per cent, equity mutual funds - 22 per cent, monthly income plans (MIP) — 45 per cent and Post Office MIS & Senior Citizen Scheme - 20 per cent.

Equity mutual funds: HDFC Equity, HDFC Top 200, Franklin Bluechip, Franklin Prima, Reliance Growth, Magnum Contra and Franklin Opportunities Fund

MIP Mutual Funds: HDFC MIP, Reliance MIP, FT MIP.

I am invested in equity funds in almost equal proportion. In the MIPs, there are almost equal amounts in all the schemes. In equities, I have opted for systematic investment.

I am drawing my monthly requirement of money by systematic withdrawal from the MIPs and MIS, and quarterly from Senior Citizens Plan. In all the MIPs and equity funds, I have opted for the growth option.

Is my asset allocation and portfolio allocation in order? If not, what are your suggestions? In your Fund Talk of April 9 you had advised a switch to HDFC Multiple Yield Fund. Which is better — HDFC MIP or HDFC Multiplan Yield Fund?

V. Chakrapani

Our view is based on the premise that the asset allocation indicated by you encompasses your entire investment portfolio.

Your effective exposure to equities is a tad above 45 per cent. At your age, this does appear to be on the higher side. We take this view despite the fact that equity returns over a three-to-five year period have the potential to outpace bonds by at least three-to-five percentage points on a conservative basis. There are, however, likely to be kinks in the return graph and you may have to go through long periods when the equity portfolio does not deliver value. You could consider a 65:35 asset allocation between debt and equity. You could move such an asset allocation over the long term than making changes immediately.

As we have no idea of the stocks that you hold, it is difficult for us to give you a clear direction on the manner in which you should scale down your equity exposure. We do, however, proceed on the assumption that you have invested in stocks of fundamentally sound companies and have also benefited from the bullish phase in equities over the past three years.

We feel your equity exposures are best taken through the mutual fund route. It could save you the bother of tracing and managing the equity investments; it will also ensure that the temptation to move a larger part of the funds into equity is kept under check.

You could cut your direct equity exposures and switch them to mutual funds over a one-to-two year period. We suggest you choose the following funds for this exercise: Kotak 30, Sundaram Select Midcap and HDFC TaxSaver, despite the three-year lock in period.

We like your choices for the fund portfolio; the only exception is Franklin Opportunities. You could move out of this fund and opt for a combination of DSP ML Opportunities Fund and HDFC Prudence. If you implement these changes, your portfolio will have an acceptable balance between large and mid-cap stocks.

The exposure to mid caps might appear to be a little high. If you do, however, adopt a three-to-five year perspective; the mid-caps could boost your equity fund portfolio by at least two-to-three percentage points as compared to an index fund or a completely large-cap tilt. This portfolio will leave you with a 35-per cent exposure to equity funds.

You could prune your MIP exposures by moving out of FT MIP and partly out of Reliance MIP; you can invest in HDFC Multiple Yield Fund, which may cut down your exposures to equity through this route.

Though MIP returns will be lower in bullish periods of the market, HDFC Multiple Yield as a superior long-term option. It has an impressive track record and its positioning is focused on mimimising the risk of capital loss and superior returns as compared to bond funds.

Launched in September 2004, it has generated returns of 9.5- 9.7 per cent consistently. The fund has been proactively managed and has kept its equity exposures to less than 10 per cent over the past six months. It opts for stocks that offer high dividend yield though this threshold has declined as equities have been on a relentless upward trend.

Such a reshuffle will leave you with a 35 per cent exposure to equity funds, 30 per cent in MIP, 15 per cent to HDFC Multiple Yield and 20 per cent to POMIS and Senior Citizen's Plan. The effective equity exposure will be just over 40 per cent. This may be scaled down to 35 per cent over long term. The choice of growth plans seems appropriate.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

S. Vaidya Nathan

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