I am 32 years old, working as a software engineer, and am a regular reader of Business Line.  I invest Rs 12,000 every month in mutual funds, as follows: Rs 1,000 in DSP Blackrock Top 100 Equity,  Rs 2,000 in ICICI Focused Bluechip, Rs 1,000 in Canara Robeco Large Cap+,  Rs 1,000 each in Fidelity Equity and Fidelity India Value,  Rs 1,000 each in HDFC Equity and HDFC Prudence,  Rs 2,000 in Premier Equity Plan A,  Rs 1,000 in IDFC Dynamic Bond Fund Plan A and Rs 1,000 in Quantum Long Term Equity.

I have an investment horizon of 20 years.  My goals are wealth generation and retirement corpus. Please advise me and suggest changes to my portfolio.

Sonaali Apart from the equity funds you mention, do you have any other savings or investments? That is not clear from your query.

If these mutual funds are your only investments, we would suggest that you also add a safe component to your portfolio. You could do that by investing in bank term deposits, the public provident fund, national savings certificates or debt mutual funds. If you are in a position to save only Rs 12000 per month, we would suggest that you set aside Rs 4,000 of that to acquire the following:

A pure term insurance plan

A medical cover , if not provided by your employer

Fixed deposits or public provident fund to take care of the safe part of your portfolio

An emergency fund equal to six months’ living expenses to take care of any exigencies. Park this sum in a liquid or short term debt fund for anytime withdrawal.

But if you already have the above investments or have a sufficient debt component to your portfolio, we can assume that the entire sum of Rs 12,000 is available for mutual funds. In that case, our assessment of your portfolio is as follows:

Well done! With your early start you can accumulate a sizeable sum by retirement. If you manage to keep up Rs 12,000/month investments over the next 28 years and the investments earn a return of 15 per cent per annum, you will have a handsome corpus of Rs 6.14 crore by the time you are 60.

You have chosen well, but investing in as many as 10 funds may leave you with an unwieldy portfolio. Five-six funds may suffice to make your portfolio sufficiently diversified. Having as many as ten funds in your portfolio makes it difficult to re-balance and monitor.

We thus suggest reducing the number of funds you own from 10 to 6. Do this by discontinuing systematic investment plans (SIPs) in a few funds once the current SIP runs its term.

Your portfolio has overlaps because you have chosen too many funds that invest mainly in large-cap stocks. Of the funds you list, six invest mainly in large-cap stocks. DSP Top 100, ICICI Focussed Bluechip, CanRobeco Largecap, Fidelity Equity, HDFC Equity and Quantum Long Term Equity invest 70-90 per cent of their portfolio in large-cap stocks. Whether you have made such a choice deliberately is not clear. A bias towards large-cap stocks protects your portfolio from excessive losses during a bear market. It also makes sure you are invested only in good-quality companies.

Avoid duplication

However as the universe of investment worthy large caps is limited, holding as many as six funds from this space may lead to substantial duplication in your portfolio. What is more, with a 20-year horizon you need not really worry about the short volatility in mid-cap funds. In fact, over that long a holding period, mid-cap stocks may be able to deliver really good results in terms of returns.

To address the above issues, we suggest the following:

Of the large-cap funds mentioned above, we suggest continuing with HDFC Equity, Quantum Long Term Equity and DSP BR Top 100. CanRobeco Large-cap lacks a comparable history and so does ICICI Focussed Bluechip despite good recent performance. Given that you need to prune your portfolio, we would also suggest not continuing SIPs with Fidelity Equity and Value. Though these funds have performed well so far, the recent change in their ownership calls for a wait and watch approach.

We are not sure why your have included IDFC Dynamic Bond Fund among the equity funds you have mentioned. Move this fund to the debt portion of your portfolio.

Now of the remaining funds you own, HDFC Prudence is a balanced fund which invests a part of its portfolio (30-35 per cent) in debt. As its risk reward equation is quite good, continue with the investment.

To make up the mid-cap portion of your portfolio you currently have only IDFC Premier Equity Fund. An excellent choice. But to this, we suggest you add the Goldman Sachs CNX 500 Fund, an index fund that simply tracks the CNX 500 index. That will allow you to have a diversified low risk, mid-cap component to your portfolio.

Finally, do review and rejig your portfolio at half-yearly intervals, as plenty can change with fund performance over a 20-year period.

Related Topics
comment COMMENT NOW