The Hindu Business Line : Fund Talk

I am a 61- year old professional and have been investing in stocks and mutual funds for over four years now. I am a long-term investor. I need a regular source of income from dividends. Kindly suggest changes to be made to my portfolio, as I feel I have diversified into too many mutual funds. Also please suggest if it is better to switch over or do systematic transfer. I hold the following funds: Birla Infrastructure, Birla Top 100, DSP ML TIGER, HDFC Midcap Opportunities, HSBC Advantage India, HSBC Dynamic , HSBC Midcap Equity, Kotak Tax Saver, Reliance Banking, SBI Infrastructure, SBI Multicap, Standard Chartered Premier Equity, Sundaram Energy Opportunity, Sundaram Select Focus, Tata Capital Builder, Tata Indo Global Infrastructure, Tata Infrastructure, Tata Service, UTI Dividend Yield, UTI Infrastructure (all are dividend options).

Vishal Prasad

As you have rightly assessed, there are too many funds in your portfolio, making it difficult to manage. Also, investing in many funds does not necessarily mean your portfolio is well diversified. For instance, although you have 20 funds, you have as many as 6 infrastructure funds that would have a great deal of overlap in their holdings.

Secondly, although your investments are spread over many funds, you are not adequately protected from downside, as several funds in your portfolio have a higher risk profile.

Theme or sector funds that are riskier than diversified funds account for more than 40 per cent of your holdings. You need to load your portfolio with mostly diversified funds; preferably large-cap biased ones. Limit your exposure to mid-cap, sector and theme funds to about 15-20 per cent of your portfolio.

To begin with, we suggest you trim your holdings in infrastructure funds to about 10 per cent of your portfolio. You can hold on to DSPML T.I.G.E.R. As you have made healthy return from Tata Infrastructure, you can consider booking some of your profits in the fund and retain the capital invested alone. You can exit the other infrastructure funds. We also recommend selling theme sector funds in your portfolio such as Tata Service Industries and Sundaram Energy Opportunities, as they may not be suitable for your risk profile. You can hold onto Reliance Banking for now as it forms a modest part of your portfolio. However, avoid further exposures, as the banking sector is currently vulnerable to downside.

Some of the above funds are closed-end and you may not be able to exit them immediately. Most of them offer a periodical re-purchase facility to offer liquidity to their investors. Use these windows to exit these funds and do not worry about the exit load.

Avoid investing in closed-end funds in the future. For your age and risk profile, we believe it is better to stick to investing in open-end funds. This will allow you to periodically book profit on your funds and sweep them into safer investment avenues, as opposed to having your money locked in a risky asset such as equity.

You can continue to invest in tax-saving funds that have a three-year lock in. However, we recommend investing in funds with a better track record such as Birla Equity Plan or Franklin India Taxshield for this purpose.

You can hold on to Sundaram Select Focus and Standard Chartered Premier Equity, which appear to be the strongest performers in your portfolio. Switch your holdings in Birla Top 100 to DSP ML Top 100, which has a superior track record.

It is early to comment on the performance of funds such as HSBC Advantage India, HSBC Dynamic, HDFC Midcap Opportunities and Tata Capital Builder, as they have a limited track record in the market. In the interest of pruning your portfolio, however, you may consider exiting HDFC Midcap Opportunities and Tata Capital Builder, as you have sufficient exposure to mid-cap/multi-cap funds.

Do avoid investing in new fund offers or in funds with a limited track record of less than a year. Invest in funds that have performed well both in market upswings and downward corrections. If you are looking to re-deploy some of the proceeds from these exits we recommend investing in a core portfolio of funds such as HDFC Top 200, HSBC Equity, DSP ML Top 100 and Sundaram Select Focus. Given the size of your portfolio, it would be best to limit the number of funds to about seven or eight.

The dividend option is a tax efficient way of cashing out on the equity market. However, the declaration of dividends by equity funds is not guaranteed and hence you cannot rely on dividends from equity funds for your regular income. Book profits on a regular basis and sweep them into fixed income instruments to minimise your risk. Ensure that you have significant fixed income instruments in your portfolio to meet your regular income needs.

SHANTHI VENKATARAMAN

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