The Hindu Business Line : Fund Talk

I am a 26-year-old professional. I have been investing in mutual funds for the last three years. Unfortunately, I have accumulated more than the desirable number of funds. Kindly help me build a good portfolio for long term. I intend to invest Rs 15,000 every month through SIP. I would like to include 1-2 ELSS funds (Rs 3000 per month). My risk appetite can be ranked at 4 on a scale of 1 to 5. Is it advisable to invest in an international fund? I already hold them. How have the flexi/multi-cap funds performed? Is it advised to include a flexi-cap fund?

Rajeev Hegde

You appear to have invested in mutual funds with the primary objective of tax saving. Six tax-saving funds in your portfolio accounting for 51 per cent of your capital. Since you wish to build a long-term portfolio, you should have more diversified funds with a good track record rather than ELSS; the latter as a category has been consistently underperforming the former and is also experiencing higher volatility.

Depending on whether you have completed the three-year lock-in the tax saving funds, we suggest you hold not more than two ELSS in your portfolio. Of the funds held by you, Fidelity Tax Advantage and Franklin India Taxshield would be our choice. While the former would allow you to participate across market cap segments, Franklin Taxshield, with its exposure to large-caps would provide conservative returns but provide some cushion during volatile phases. While we can suggest other ELSS, you will only end up adding more tax funds again. So use the SIP route to invest in these two funds. Exit the others upon completion of the lock-in period. Consider other debt options such as provident funds and fixed deposits to save tax.

Core portfolio: Barring Magnum Contra, Sundaram Select Midcap and Reliance Growth, we do not see any other strong candidates for a long-term portfolio. Consider exiting Reliance Equity and instead add DSPML Top 100. This should provide you superior returns with the large-cap exposure that Reliance Equity seeks to hold. Also add units of Birla Sun life Equity.

Reliance Growth has delivered superior returns (as against Sundaram Select Midcap) considering its midcap bias. However with a huge corpus, the fund may start facing challenges in taking exposure to the mid-cap space. So if you are looking at mid-cap exposure for the future, Select Midcap with its relatively compact asset size may hold better potential to participate in this space. Use SIPs for core funds and consider the growth option as you have a long term time horizon. JM Basic is a high-risk fund. While the fund has shown promise in recent times, it has also taken sharp hits during market corrections. Hold this fund if you can take the risk but consider booking profits frequently if the fund does not declare any dividends.

Sector funds: Reliance Diversified Power Sector fund is more focused on power and power related companies while Sundaram BNP Paribas Capex Opportunities has a broader theme. Both funds have been performing well. However, given your high risk appetite you can consider holding Reliance Diversified Power and exit the latter after it achieves your target return. It appears that have ill-timed you entry into Reliance Banking and are sitting on heavy losses. Hold the fund for now. Consider setting target returns for sector funds in general to book profits if you are unable to time your exits (sector funds demand timing the buys and sells in line with the sector performance).

Gold can be a good diversifier. Continue to hold DSPML World Gold Fund. However, remember that unlike gold ETFs, DSPML World Gold Fund invests in stocks of mining companies and not directly into Gold. Hence, the investment asset class will remain stocks (with higher risk return profile) although gold demand will remain the key driver for such stocks. Moreover, while gold mining stocks deliver much higher returns than gold itself at a time of rising gold prices (thanks to the leverage effect), they lose equally heavily when gold prices begin to melt.

International funds can provide some diversification to your portfolio. However, you may need to have some conviction in overseas markets if you wish to invest in international funds. Of the funds that you hold, the scheme from Fidelity is more focussed on opportunities in Asia-Pacific (ex-Japan), while Birla has a broader universe but has hardly any track record. As a fund house, Fidelity has an international arm and may perhaps be better placed to take global calls. Based on this, you can consider holding on to the scheme from Fidelity.

Diversified funds have enough flexibility to shift between market caps to take advantage of a rally. Hence you may not need a separate multi/flexi cap fund. The flexi-cap strategies also do not appear to have delivered any exceptional returns vis-À-vis other diversified funds.

VIDYA BALA

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

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