Mutual Funds

Fund Talk: Sector funds are not for passive investors

K. VENKATASUBRAMANIAN | Updated on June 09, 2012

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Monitor your portfolio and periodically weed out underperformers and rebalance.

I have investments in the following funds through the SIP route: Morgan Stanley Ace, Religare Contra, Axis Long Term Equity, Franklin India Blue Chip and J.P Morgan India Equity. In each of these funds, I have invested Rs 1,000.

Please let me know if the above investments are worth continuing. Should I exit a few and move to some other options?

I also have some investments in SBI magnum Tax gain, Kotak Tax Saver (both SIPs stopped after three years); Reliance Pharma, Reliance Banking Fund and Morgan Stanley Multi Asset.

Sasikumar Nair

Your portfolio has quite a few limitations. First, you have invested a relatively smaller sum across too many funds, leading to over-diversification and lack of specific strategy. Second, the choice of funds is also not top notch whether in terms of their having a long track record, or in delivering superior returns.

Finally, your problem is compounded by investing through SIPs in tax funds and through exposure to sector funds.

You have also not stated when you started investing in these funds or towards which set of goals you wish to save.

But having said this, your portfolio can still be cleaned up.

Invest Rs 2,500 in Franklin India Blue Chip. The balance Rs 2,500 can be parked in Canara Robeco Equity Diversified. Exit the other four funds as they do not have a long-term track record and their returns have lagged stronger peers, such as the ones we have suggested, over the last three years.

Coming to your tax funds, it is not wise to invest in such schemes through the SIP route as each instalment is locked for three years. So, exit these funds once the lock-in period is over. We suggest selling both SBI Magnum Tax gain and Kotak Tax Saver as they have lagged their category returns over the past three years.

Morgan Stanley Multi-Asset is a very recent launch and so has no track record to go by.

You have also invested in two sector funds. Both Reliance Pharma and Reliance Banking have delivered superior returns over the past few years as the underlying themes have mostly outperformed. Investing in sectors should be done if you have a definitive view on the fortunes of the underlying segment and can time entry as well as exit.

If that is difficult, investing in diversified equity funds is a better bet. If you can stomach risks, retain both the sector funds and book profits during rallies and exit them once your return targets are met.

You also need to systematise your corpus building process by having a definite timeline, specific goals and appropriate risk appetite. These will help in choosing the appropriate investment avenues.

*** I have been investing in the following funds through SIPs for the past two years — Rs 15,000 in ICICI Focussed Bluechip and Rs 7,000 each in HDFC Top 200 and IDFC Premier Equity. I have an additional 6,000 to invest monthly.

Can you suggest another equity fund (not gold) to invest in? I have also been investing, yearly, a sum of Rs 70,000 in PPF. I will require Rs 48 lakh in 2024, and then Rs 1.5 crore in 2030 for retirement (both future values).

Ram

It is nice to note that you have exact figures of the corpus you wish to accumulate, that too within a fairly long timeframe. What's more, you are already in investment mode.

But having said all this, you are investing Rs 29,000 currently and wish to add another Rs 6,000, making it a fairly large sum that needs to be spread across at least 6-7 funds.

Now you must reallocate sums to individual schemes to create a well-balanced portfolio.

Here are our suggestions on how you could go about your twin targets.

If you invest Rs 35,000 per month for 12 years (till 2024) from now and the investments earn 12 per cent annually, you would have a corpus of around Rs 1.1 crore. You can withdraw Rs 48 lakh from this amount. If the balance Rs 62 lakh earns 10 per cent for the next six years, you will have an amount of around Rs 1.1 crore. In addition, the value of the funds that you have invested (Rs 6.6 lakh at present value), if allowed to grow at 12 per cent, could give you an additional Rs 50 lakh, taking your total corpus to Rs 1.6 crore.

Invest Rs 7,000 each in HDFC Top 200, ICICI Focussed Bluechip and IDFC Premier Equity. Park Rs 6,000 in Canara Robeco Equity Diversified and Rs 4,000 each in Quantum Long-term Equity and HDFC Balanced.

We have taken reasonably conservative returns estimate and abnormal returns in any year should be used to sweep profits and proceeds moved to safer debt instruments.

With regard to your retirement in 2030, if returns on the above funds are higher, keep moving the proceeds to good debt funds such as Birla Sun Life Dynamic Bond and HDFC Multiple Yield.

Monitor your portfolio and periodically weed out underperformers and rebalance.

You had mentioned PPF investments too. This is a good option. When you have a higher surplus, increase investments in PPF to Rs 1 lakh.

You can also lock into fixed deposits for the longer term at the current attractive interest rates.

Queries may be e-mailed to mf@thehindu.co.in

Published on June 09, 2012

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