The Hindu Business Line : Fund Talk

I became a resident Indian five years ago. I am 60 years old. I started investing in mutual funds four years ago to get tax-free income comparable to bank interest. This worked well till January 2008. I did not exit from any fund on correction and instead made fresh investments to the tune of Rs 22 lakh in April 2008, which is now complicating the entire portfolio. I can wait for longer periods to realise my lost ground I attach a list of my investments. (I am not including my investments in ELSS funds as they have lock-in period). Please advise me how to consolidate my investments like exiting dull/repeated funds and diverting them to good funds to realise lost ground.

K. Madana Gopal

Tirupati

Your portfolio exposure is as follows: Diversified equity funds including mid-caps 55.8 per cent, theme funds 21 per cent, balanced funds 1.8 per cent, international funds 20 per cent, gold 0.6 per cent, debt 0.8 per cent. The most striking feature of your portfolio is that it is highly unwieldy, what with 85 funds in all; it also has high exposure to new funds (perhaps invested at the time of NFOs).

Small exposures spread over a large number of funds, is also a sub-optimal strategy as the performance of good funds would be dragged by the laggards. We do not have details of your exposure to other debt instruments such as bank deposits or post-office savings schemes. Considering your age of 60, we presume that you are retired or not too far from retirement. If this were the case, an exposure of over 30 per cent of your total wealth to equity is a high-risk strategy. If you are, however, keen to hold large sums in equity, then the high value of your investments would require the help of a professional financial planner.

Getting it straight

While you can take a call on the above, we would suggest a more compact portfolio for your fund holdings. With the market having fallen sharply, this may be the right time for you to realign your portfolio and take a re-look at your objective behind investing in equity funds. Dividends from equity funds are no substitute for regular interest income.

Equity funds provide you a platform to build long-term wealth. No open-end equity fund can guarantee your capital, leave alone dividends. Further, saving tax must be a secondary objective at this stage of your life. You cannot afford to lose capital at the cost of saving taxes on interest. Two, averaging costs on market declines is a good idea. However, this should be done by accumulating good funds. Unfortunately you seem to have bought through the NFO route — that too in a number of close-end theme funds such as infrastructure and energy. This would prevent you from exiting or booking profits when you have made sizeable profits. The themes are also vulnerable to cycles, thus prompting sharp reversals of rallies. Three, avoid close-end funds especially in sector themes or small-caps. They have so far not proved their mettle.

Portfolio rejig

You should seek to bring down the number of funds to manageable levels of 20 and later to about 15 funds. Hold a good 50-60 per cent in diversified funds, about 10-15 per cent in mid-caps and the rest between international funds, debt funds and gold ETFs. In the diversified funds category, you can retain Birla Sunlife Equity, DSPML Equity, Fidelity Equity, HSBC Equity, HDFC Top 200, Magnum Contra, Kotak 30, Reliance Growth, Magnum Contra and Sundaram Select Focus.

Among the other funds, there are a good number of them on which you would be sitting on profits had you invested 3-4 years ago. Exit them first and consolidate your position in the above funds such that exposure to individual funds is in the 3-6 per cent range. Increase exposure to the three balanced funds. Among themes, exposure to Sundaram Capex Opportunities and ICICI Pru Infrastructure would suffice. Most of the other theme funds are close-ended. Watch for their performance and exit post the lock-in period, if you have made some returns.

Among international funds consolidate positions in Templeton India Equity Income and Fidelity International Opportunities to add up to not more than 15 per cent of your portfolio value. Watch for Birla Sunlife International Equity’s performance and move to the first mentioned funds, in case the latter’s performance is uninspiring. In the mid-cap segment you have high exposure to Franklin India Smaller Companies. Exit the same after lock-in. Reliance Growth and Birla Sunlife Equity would provide sufficient mid-cap exposure. You can retain Birla Mid-cap and add HSBC Midcap, if you are particular about more mid-cap exposure. However, book profits in these funds on setting target returns.

You can accumulate gold ETFs as a diversifying measure. Gold is currently trading weak and may provide an entry opportunity in the coming months. Add exposure to debt through FMPs that seek to invest in debt instruments with good credit rating.

Your strategy of using the dividend option has mitigated your capital erosion. Continue the strategy. Do not take high exposure to tax-saving funds; consider five-year tax-saving fixed deposit with banks or post-office senior citizens scheme (for which the qualifying age is 60 years) for tax deduction.

Sell or switch in a phased manner. First, sell funds that do not appear in our favoured list (above) but have positive returns. Then, go on to sell the others during a revival by setting realistic target returns that would ensure you get back some capital. However, there is no guarantee that you will gain all your lost capital in this process. You can, at the most, weed out the underperformers and build a compact portfolio.

VIDYA BALA

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