The Hindu Business Line : Fund Talk

Theme funds are usually good vehicles to piggyback on concentrated run-ups in a select set of stocks or sectors because of a specific economic or macro trend.

My age is 32 and I have a surplus of Rs 50,000 for investment per month. I think I should invest into Fidelity Equity Fund for diversification. I need this money only at 45. I am very comfortable with volatility in my portfolio. My present investments are in the following proportion: DSPML T.I.G.E.R. (11.5 per cent), HDFC Long Term Advantage Fund (12.2 per cent), HDFC TaxSaver (12.7 per cent), Magnum Contra (18.2 per cent), Reliance Diversified Power Sector (34.8 per cent), Sundaram BNP Paribas CAPEX Opportunities (5.2 per cent), Sundaram BNP Paribas Select Focus (5.4 per cent). Kindly advise what I should do? Does my portfolio need any additions or reduction in the funds?

Harish Tergaonkar

The choice of funds for your portfolio is good. The diversified funds that you have chosen — HDFC Taxsaver, Magnum Contra and Sundaram Select Focus — all have a good performance record over the past 4-5 years. You have also selected theme funds that were well placed to piggyback the boom phase in the infrastructure and power sectors. These have delivered exceptional returns over the past year. But having taken note of this, our suggestions on your portfolio are threefold:

Though you have a 12-year horizon for your investments, some of the theme funds you own will require close monitoring. Theme funds are usually good vehicles to piggyback on concentrated run-ups in a select set of stocks or sectors because of a specific economic or macro trend.

Such a trend may run its course over a 3-5 year period, after which it may stop outperforming the market. It will, therefore, be advisable to revisit your selection of theme funds twice every year, to evaluate if existing ones need to replaced by new, more promising themes. With your diversified funds, you can consider a buy- and-hold approach. Fidelity Equity Fund is a reasonable choice for deploying your new surpluses. In addition, we would suggest funds such as DSP ML Equity Fund, Birla Sun Life Frontline Equity and HDFC Equity, based on their return record.

Your query gives the impression that a lion’s share of your overall savings are invested in equity funds, that too focussed on the Indian markets. This makes your portfolio too vulnerable to the ups and downs of just this one asset class, which may not be desirable from the perspective of containing risk. Yes, your bet on Indian stocks has worked out brilliantly thus far. However, you cannot be sure that stocks will continue to outperform all other asset classes consistently over the years, as stock markets tend to go through cycles. True, you have indicated that you are comfortable with volatility; but there is no reason why you should lose capital to market swings just because your portfolio isn’t diversified enough.

That’s why, even if you have a long investment horizon of over 10 years, as you indicate, you should have a more balanced asset allocation. We would suggest that you add debt and insurance options to your portfolio if you don’t own any. If you do already own these options, there could be ways to diversify your portfolio, without compromising too much on returns.

As you are comfortable with mutual funds, you could consider the following funds which may offer a good diversification option for your portfolio:

Magnum Comma Fund: A fund which invests in stocks of commodity companies, its portfolio is likely to be quite different from that of other diversified funds and may closely mirror the fortunes of commodities rather than stocks.

Gold: Gold often tends to perform well when assets such as equities don’t. It may help to own gold through Gold Exchange Traded Funds such as those offered by UTI, Kotak and Benchmark mutual funds. Alternatively you can own DSPML World Gold Fund which focuses on stocks of gold mining and production companies worldwide.

International funds: Fund houses such as Templeton and Fidelity offer funds that invest in a combination of stocks from India and other emerging markets or in the latter exclusively. Such funds let the fund manager choose from a wider basket of stocks and may help diversify currency and region specific risks.

AARATI KRISHNAN

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