The Hindu Business Line : Fund Talk

I am 25 years old and employed. I can save Rs 7,500 a month. I invest in mutual funds with a long-term horizon. I am unlikely to use the funds until 2015. I have tried to classify the funds: Core Portfolio: SIPs of Rs 1,500 each in Reliance Regular Savings Fund, Birla Sunlife Equity, DSPML Equity(G), DSPML Tax saver (D). Others: SIPs in JM Emerging Leaders Fund, Rs 1000 and Reliance Banking Fund Rs 500. Is my choice of funds under the above classification correct? Besides, I have started another SIP in DSPML World Gold Fund (D). Why do you suggest not to hold too many funds from the same fund house? Is switching from a diversified equity fund to an ELSS within a fund house a good decision?

Amit Thakur

It is good to know that you have made a start towards disciplined investing early in life. You have also made a good attempt at classifying your portfolio into core and other funds. Here are a few broad factors that may help you choose and also review the right funds that need to be in your long-term portfolio.

- Look at the performance record of the fund for at least three years on a risk-adjusted basis (look for sharpe ratio).

- Has the fund managed to consistently beat its benchmark? Have there been any recent dips in performance and, if so, have peers too underperformed?

-Has the fund been through market corrections and, if so, how has it fared? While many funds would have shown stellar returns since inception, it may well be that these funds have only witnessed a bull rally.

- Has the fund stuck to its broad objectives or strategy? Does this suit your risk profile? For instance if you have a low risk appetite, you may not wish to hold small and mid caps as part of your core portfolio.

- Who is managing the fund? What is the performance of other schemes managed by the same person? If there has been any recent change in the fund management, has the portfolio undergone any significant change in terms of stocks held as well as returns?

- Are the funds you choose similar to the ones you already hold in terms of portfolio/objectives? Avoid such duplication and seek to achieve diversification.

Core: Moving on to your portfolio, you do hold some good funds. However, there appears to be some replication. DSPML Equity and Birla Sunlife Equity are similar in terms of objective as well as their holding across market-cap segments. Hence, we suggest you retain one of them and exit the other. We would prefer retaining Birla Sunlife Equity. Switch from DSPML Equity to DSPML Balanced Fund instead. While Birla Sunlife Equity would provide exposure across market-caps, add Sundaram BNP Paribas Select Focus to provide a more focussed large-cap exposure. These three funds should help you build wealth with your present monthly contribution.

Others funds: Continue to use DSPML Taxsaver for tax-saving purposes. However, this cannot form part of your core portfolio, give its higher risk profile. JM Emerging Leaders is a mid- and small-cap focussed fund with a relatively short track record. As its performance has been encouraging, continue with the SIP, provided you can stomach the volatility that mid-caps are vulnerable to.

Reliance Regular Savings has performed well but need not form a part of your core holding, as it sports a slightly risky portfolio. Continue to hold the fund but book profits periodically, leaving the corpus to grow.

You can hold on to Reliance Banking. But discontinue your SIP once the contribution is over 10 per cent of your total capital into equity funds. Being a sector fund, it carries higher risks; it would therefore be prudent to avoid indefinite accumulation, unless you are well informed on the outlook for the sector. DSPML World Gold Fund has been performing well. You can consider 5-10 per cent asset allocation to the scheme and view it as a diversifier.

Fund houses: We prefer a portfolio that has different techniques of investments (aggressive/conservative, quantitative/qualitative), so that you may benefit from the varying investment styles during different market phases. Further, funds managed by the same fund manager or fund house sometimes show a tendency to replicate the stock portfolio across schemes in that fund house.

This is the reason why we would like you to spread your funds across a few fund houses. This does not mean that you choose a mediocre fund merely for the sake of diversification.

Do not switch from a well-performing fund to ELSS for tax purposes. It may become a case of lost opportunity. Consider debt options too for tax purposes.

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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