The Hindu Business Line : Should I invest globally?

I wish to streamline my investments in mutual funds. I have a time horizon of 3-5 years and return expectation of around 30 per cent annually. I have investments in DSPML: Equity, T.I.G.E.R.; Fidelity Equity, Franklin India Flexicap, HDFC: Equity, Tax Saver; ICICI Pru: Emerging Star, Infrastructure; Reliance: Equity, Growth, Vision; SBI Magnum: Contra, Comma, Multicap, Taxgain; Sundaram: Select Focus, Capex and Tata Pure Equity. Please suggest a model portfolio covering my existing funds and suggest addition/redemption of new funds to generate better returns. Should I add one or two world market/emerging market funds and if so, which ones? Please also suggest one or two better performing tax saving funds.

Adarsh Kumar

New Delhi

Before suggesting changes to your portfolio, we would urge you to moderate your return expectations. The more than four-year bull market that ended in India this January was an exceptional period of high returns for equity investors. The annualised return of 35-40 per cent that was generated by equity funds over this period is not sustainable.

We are in for more volatility, if not a protracted period of stale market conditions. Investors who retain their holdings through the ups and downs of equity market, however, can expect an annualised return of 12-14 per cent over the next five years.

Although the funds in your portfolio are not poor choices, you can consider weeding out some of the underperformers in the portfolio. This will boost returns and make your portfolio more compact and easy to track.

Book profits in Franklin India Flexicap and Magnum Multicap to start with. We recommend holding a mix of large-cap and mid-cap funds rather than flexi-cap or multi-cap funds. The “flexi-cap” strategy of dynamically switching between large-caps and mid-caps, depending upon market conditions, has not delivered so far, in our view. You may consider exiting Reliance Equity, as its performance fails to impress. Switch your holdings in HDFC Equity to HDFC Top 200. The latter has displayed greater consistency in performance over the past two years.

Add mid-cap funds. Your portfolio currently lacks a strong mid-cap fund. ICICI Pru Emerging STAR had a good start but has underperformed its peers over the past year. You can consider exiting the fund. You can retain Reliance Growth and add Sundaram Select Midcap to boost your holdings in mid-cap funds. This will enhance your portfolio returns, although mid-cap funds also have a higher risk profile and are suitable for those with a stomach for volatility.

Retain the other funds in your portfolio for now, as they have been strong performers. You have three infrastructure funds in your portfolio, all of which have performed well. You can retain them, but ensure that your overall exposure to infrastructure theme funds remains at 15 per cent. If its higher, we suggest that you retain ICICI Pru Infrastructure and book profit in DSP ML TIGER and Sundaram Capex.

For tax-saving purposes, continue investments in Magnum Tax Gain. Fresh investments can be considered in Sundaram Tax Saver or Birla Sun Life Equity Plan.

On international investing: Besides the fact that overseas markets offer investment options that are not available in India (gold mining companies, natural resources, commodities, real estate), a global portfolio also minimises concentration risks. With a weakening currency, overseas investments may look even more attractive now.

However, most of the ones on offer in India currently do not protect investors adequately from downside. The reason is they are all mostly invested in Asian markets or emerging markets, which move in the same direction as the Indian market. That is, global cues affect these markets the same way.

Hence, if you wish to diversify your portfolio, you may be better off investing in funds focused on Latin American markets (ING Vysya is to launch one) or global markets. Our pick would be DSP ML World Gold Fund, which takes exposure to gold mining companies. A 5 per cent exposure would be sufficient. Plan your investment in phases to avoid buying at peak gold prices. If prices of gold falls, the decline in the fund’s net asset value would be steeper as it invests in stocks and not gold itself.

SHANTHI VENKATARAMAN

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

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