The Hindu Business Line : Fund Talk

I wish to revisit and reduce portfolio risk on my fund portfolio, which I have been building to send my son for studies abroad by Fall 2009. I am worried about the erosion in NAV in recent times. I can invest about Rs 7,000 per month in mutual funds. My present portfolio consists of HDFC Core & Satellite Fund, Reliance Vision, Franklin Flexicap, Franklin Smaller Companies Fund, UTI Mastershare, HDFC Equity, Reliance Equity Advantage, HDFC Infrastructure.

Ramachandran

Bangalore

With less than a year for you to cash in on your portfolio, we fear there aren’t too many options available to you at this juncture. The broad markets are down by about 30 per cent from their peak value as of January and the funds you own have all suffered significant erosion in value of 25-40 per cent, on their NAVs of January 2008. With stock valuations battered significantly, this certainly isn’t a great time to exit equity funds. Yet, as your goal is barely a year away, it may not be advisable to risk your capital any further.

In any case, there isn’t too much time left for your portfolio to recoup lost ground. The outlook for the equity markets in the months to mid-2009 (when you need your money) isn’t very rosy. Corporate earnings in India have just begun slowing on factors such as rising commodity prices and higher interest rates.

Foreign investor flows into Indian stocks have also turned negative on the back of higher volatility. The political uncertainty caused by elections, which are likely within the next year, is also expected to keep stock prices quite volatile over the next few months.

Therefore, if you looking at a one-year horizon, we wouldn’t advise you to put any fresh money into equity funds. You should consider fresh investments only if you are prepared to wait out the current rough phase and hold on to your equity funds for the next five years. With earnings growth for Indian companies expected to be back on track over a 2-3 year time frame, the current valuations do offer comfort for investors willing to buy with a five-year horizon.

The course of action you should adopt on your existing portfolio now depends on two factors — how close you are to attaining the sum that you targeted for funding your son’s education and whether you have other means to meet your target apart from the above equity funds.

If you have alternative means to fund your son’s education, we would suggest you reshuffle your equity fund portfolio to lighten its risk profile and wait for a partial market recovery before redeeming your units. Most of the funds in your portfolio haven’t weathered the recent market correction well and all of them (except UTI Mastershare) now carry a negative one-year return.

Diversified equity funds with a bias towards large-cap stocks may be your best bet when it comes to containing any further downside.

We therefore suggest you exit funds such as HDFC Infrastructure, Franklin Smaller Companies (if there is an exit window), Reliance Equity Advantage and HDFC Core & Satellite Fund.

Switch to less risky funds with a superior performance record such as HDFC Top 200, HSBC Equity, Franklin Prima Plus and DSPML Top 100 Fund. Once you complete the switches, monitor your portfolio closely with a 15-20 per cent return ‘target.’ Exit your funds when the target is reached and invest the proceeds in safe debt options.

Assuming you started on this portfolio 3-4 years ago, you may already have come pretty close to attaining your targeted sum. In that case, we believe you should not risk further erosion in its value by remaining invested in equities over the next one year.

We would advise liquidating your equity funds in phases and moving gradually into safe options such as Fixed Maturity Plans or Liquid funds, so that your entire capital will be at hand when you need it in mid-2009. However, given that stock markets have already plunged very sharply and may be close to the bottom, do not redeem all your funds in one go. Monitor returns closely and use any partial recovery in the markets to gradually exit your investments.

In future, do take care not to rely on equity or equity fund investments to meet any financial goal that comes up within a short time frame of less than three years. Corrective phases like the recent one are difficult to predict and can wipe out a big portion of your capital, just when you need it. A longer investment horizon will allow enough time for your equity investments to recover lost ground.

AARATI KRISHNAN

More Stories on : Mutual Funds | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page