The Hindu Business Line : Fund Talk

If you are an astute investor, consider investing small sums on every 5 per cent or more declines in the broad market. Otherwise, use the SIP route.

I am 27 years old. I have invested in the following mutual funds. SBI One India Rs 15,000, SBI Magnum Contra Rs10,000, Reliance Growth Rs 10,000, Fidelity International Opportunities Rs.10,000, Tata Indo Global Rs 10,000, DBS Chola Infrastructure Rs 10,000, ICICI Prudential Indo-Asia Rs 10,000, Tata Indo Infrastructure Rs 10,000, Birla Sun Life International Rs 5,000, HSBC Emerging Markets Rs 15,000, JM Basic Rs 15,000, Principal Large Cap Rs 15,000 and HDFC Infrastructure Fund Rs 15,000. I also have an SIP with SBI Magnum for Rs 1,000 per month. I have no immediate financial needs and I want to earn 14 per cent returns from the above investments, at least from 2010. Which funds do I need to exit?.

Pragatheesh

You have done well to start a portfolio at a young age. Unfortunately your entry into the market, mostly between April 2007 and February 2008, could not have happened at a more unfortunate period. Your funds have declined 28-73 per cent from their respective date of purchases. Nevertheless, given your age, you have plenty of time to re-jig and recoup the same.

Too many NFOs: It appears that you have purchased a number of funds during their new fund offers. New funds are among the worst hit in the market correction that started in January 2008. Further, given that these funds have little history to fall back, an investor will have little clue as to such funds’ ability to manage a volatile market.

Now, coming to your portfolio, you have 40 per cent of your capital in diversified funds, 32 per cent in international funds and the remaining 28 per cent in close-ended infrastructure theme funds.We feel that a 30 per cent exposure to theme funds, that too close-ended, appears a highly risky strategy. Theme funds require tactical entry and exit strategies to earn reasonable returns for the high risks undertaken. Similarly, unless you have reason to believe in the growth story in international/emerging markets, an exposure of over 30 per cent can be risky. Please note that a number of countries, apart from the US, have officially slipped into a recessionary phase. India has so far only witnessed a mild slowdown in growth.

You can consider at least 60 per cent exposure to diversified funds with a strong track record. Given your age, risk appetite and entry point in to various funds we suggest the following changes for your core portfolio: Add DSPBR Top 100, HSBC Equity, Sundaram BNP Paribas Select Focus and DSPML Balanced. You can hold Reliance Growth and Magnum Contra. Exit JM Basic and Principal Large Cap. While the former may bounce back sharply on a market rally, the fund can hurt your overall portfolio returns, if the present performance persists. Principal Large Cap has underperformed a number of other large-cap funds; such sharp divergence in performance from the category-average need not be tolerated.

If you are an astute investor, consider investing small sums on every 5 per cent or more declines in the broad market. Otherwise, use the SIP route.

As your entire infrastructure funds are close-ended, review their performance and consider exiting post the lock-in, if the funds have underperformed similar open-end infrastructure funds. We would prefer ICICI Pru Infrastructure among the infrastructure theme funds.

We feel that you may have too many international funds in your basket. Fidelity International Opportunities has been around for sometime now; its performance has so far been encouraging. You can hold on to the fund. You have not stated whether you hold the Option A or Option B of Birla International Equity. Option A has higher exposure to foreign equities and has contained declines better than Option B. If you hold the latter you can consider exiting. We suggest you exit the other international funds that you hold based on the performance over the next couple of quarters.

You have not provided the name of the Magnum fund in which you have an SIP.

You can also consider diversifying into other asset classes with about 10 per cent exposure to gold through ETFs. Add debt instruments through FMPs and fixed deposits. Look for options that allow you to lock into about 10-11 per cent returns over a three-year period. In case of FMPs, know the investment universe and the credit quality of the instruments in to which the FMP invests. As far as possible, hold on till maturity to allow the FMP to return a yield similar to the underling instruments in which it is invested.

You expectation of 14 per cent annual returns, beginning 2010 may yet be achievable, assuming the broad market as well as the economy witness a revival from the second half of 2009. However, remember that your target is best achieved by booking profits on setting internal targets. Deploy the money into better opportunities existing at that time or sweep them into safer avenues in debt, if you are nearing a goal.

VIDYA BALA

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