I am a 32-year-old married IT professional. I have been investing in mutual funds since 2005. Around November 2007, I booked profits and reinvested the principal as well as the profits in 18 funds, as advised by my agent. I want to remain invested for the next 17-20 years. I want my portfolio to give me a return of 20 per cent per annum. I have a moderate to high-risk exposure. Please review my portfolio and suggest appropriate changes, if required.
-Anupam Das
Mr Das, you might have heard the saying: ‘Too many cooks spoil the broth.’ Well, at the moment, this saying applies to your mutual fund portfolio. Not your entire investment portfolio, mind you, but just your mutual fund holdings. This requires quite an intensive rectification. However, there is nothing to be worried about. We have worked out a modus operandi for you that will enhance your portfolio’s performance.
But let’s first address your expected and desired rate of returns -- 20 per cent per annum. Your current portfolio is tilted towards debt, with 62 per cent of your money in this asset class. The major cause of this tilt is the fixed deposit investments.
REFURNISH YOUR ASSET ALLOCATION
Your approximate debt-equity allocation comes to around 60:40. Now assuming a 20 per cent annual rate of return from equities and 8 per cent from debt, your current portfolio will give you a return of approximately 12.8 per cent returns per annum, which is far less than what you expect from your investments.
To enhance this rate of return, we suggest that you invest the income from your fixed deposits in mutual fund schemes using the systematic investment plan (SIP). This will enhance the returns you earn from your portfolio and, furthermore, the SIP will significantly reduce the risk associated with equities as well.
OPT FOR FEWER FUNDS
Now, let’s take a look at what’s wrong with your mutual fund portfolio and how it can be set right. About 37 per cent of your entire portfolio is dedicated to your mutual fund holdings, but it is done through way too many funds — 18 in all. This means that each mutual fund has a minuscule impact on your portfolio. Hence, you need to cut down the list to seven or eight large-cap-oriented equity diversified funds with a proven track record.
As far as the diversification is concerned, the portfolio is fine. But when the same diversification can be achieved from fewer funds, why bear the unnecessary burden of managing so many funds and tracking each one of them?
We have created a model mutual fund portfolio. We have squeezed down the number of funds to just seven. All these funds are of high quality with proven track records. Five out of the seven funds are large-cap equity diversified schemes, one is a sector fund and one a dividend yield fund.
The large-cap equity diversified funds are picked up to make the portfolio performance concentrated. ICICI Prudential Infrastructure Fund, the sector fund, will add flavour to your portfolio, while UTI Dividend Yield Fund, an equity diversified fund with a mandate to invest in high dividend-yielding stocks, will act as a counter-balance in the market downside. Since the markets are always unpredictable, keeping a fund like this as a core holding will reduce the downside risk of the portfolio.
We have not changed anything in your stock holdings as you have picked all blue-chip stocks for a long-term purpose.
STAY AWAY FROM ULIPS
The last thing you need to do is shun unit-linked insurance plans (Ulips). They are an expensive investment avenue as the recurring charges and commission for agents eat away most of your money.
Moreover, you don’t need them because you already have a term plan from Life Insurance Corporation. If you still need more insurance, you can avail yourself of this benefit through mutual fund schemes that offer insurance cover for investments through SIP, wherein the premium for the insurance is also borne by the AMC.
We hope we have been of help and have cleared up your ambiguities. We’re sure that, given your long-term time horizon, your investments will bear fruit and meet your expectations. Just remember to review and rebalance your portfolio once every year.
