The Hindu Business Line : Fund Talk

I am 62 years old and retired. I have invested in mutual funds at different times over the last year and a half, taking advantage of market corrections. I will remain invested for 5-7 years. I have other sources of income. Some of the funds are laggards. What should I do? I may invest more in some of the existing or new funds. Please suggest changes to achieve annual return of 15-20 per cent.

S. K. Bakliwal

Funds: HDFC Equity, Magnum Contra, Reliance Vision and DSPML T.I.G.E.R – each accounting for 12-20 per cent of capital invested. HDFC Top 200, Sundaram Select Midcap, Kotak 30, Magnum Global, HDFC Prudence, Magnum Taxgain – each 4-10 per cent of capital. HDFC TaxSaver, Sundaram TaxSaver, Franklin Bluchip, DSPML Small & Midcap, Principal Personal Taxsaver, HSBC India Opportunities – allocation of less than 2 per cent in each.

Buying on market corrections has not worked much in your favour so far, given that your portfolio sports an absolute return of 6.3 per cent. It is rather discomfiting to see one’s equity portfolio under perform even some debt options.

Limiting factors : While the size of your portfolio (16 funds) does appear a bit unwieldy, you have mostly chosen funds with a good track record.

However, your portfolio does not look encouraging for the following reasons: One, you have turned to active investing at a time when the markets are going through rough patches. Two, your portfolio is only 1.5 years old and needs a longer time to prove itself. Three, you have not been using the SIP route to average costs; you have instead tried to time the market as you would do with buying stocks. This has not proved to be the best strategy for your portfolio.

We will now elaborate on how the above factors subdued your portfolio performance. Apart from a few investments made in 2006, a good amount of your lump sum investments have been made in 2007 and more so in 2008. While the markets have been tricky in 2007, they have only become more testing in 2008.So even if your investments made in 2007 sported decent returns earlier, they would have taken a hit in 2008.

Understandably, you have tried to add good funds such as Kotak-30 and Reliance Vision over January and February 2008, months that you would have perceived as being corrective phases. However, most of your investments have been made very early into the corrective phase simply because you did not know if the correction would prolong.

For example your investments into Reliance Vision or Kotak-30 were made mostly at the 19000 Sensex levels. Clearly, the Sensex at 16,000 now is below your buy level, dragging your portfolio. Your timing might have worked if you had also bought in March, when the market was at a low of 14000-16000. Buying into mutual funds should not be viewed as buying directly into stocks.

The portfolio of funds change to suit market phases. So a good fund manager would do the needful to take advantage of corrective phases. However, if you do want to accumulate, then you should not only be adept but also be patient enough to let the averaging work for you.

How SIPs would have helped : An SIP in Kotak 30 from January 2007 would have returned 13 per cent as against the loss of -1 per cent you currently face. Similarly SIP on Reliance Vision from November 2007 (your first investment in Reliance Vision was in October) would have delivered 8.2 per cent as against your loss of -1 per cent.

ELSS underperform : As almost all your tax saving funds have been faring poorly, you have tried to lower costs by buying more.

This has dragged your portfolio returns. Do not buy any more of tax saving funds. As a retired person, you cannot afford to lose capital for merely tax saving purpose. Invest in avenues such as Post Office Senior citizens scheme which will enjoy deduction under Section 80C effective April 2008.

Makeover : While we do not know your debt equity proportion, ensure that at least 70 per cent of your money is invested in debt options. Consider small amounts of SIPs in Kotak 30 and HDFC Equity. You have sufficient holding in Reliance Vision and Magnum Contra.

Book profits every time the funds swell by over 15 per cent. Invest the amounts in debt options such as Fixed Maturity Plans. Hold Sundaram Select Midcap and HDFC Prudence. Exit Franklin Bluechip, Magnum Global, HSBC India Opportunities and DSPML Small & Midcap.

You hold other funds to provide similar investment strategies. You will have to cut your 19 percent exposure in DSPML T.I.G.E.R to less than 10 per cent. Returns of 15-20 per cent would be a tall order if present market condition persists. Lower expectations to 12-15 per cent.

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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