I am 42 years old. I have started investing since 2005. Though my investments in mutual funds gave a good returns for the first two years, I didn’t book profit. I thought staying invested will help me yield better returns in the long term. Now I wonder if it was a mistake. Despite the fall, I am still investing every month through a systematic investment plan (SIP). I invest Rs 10,000 in DSPBR T I G E R and Kotak Opportunities, Rs 8,000 in SBI Taxgain and Rs 5,000 in HDFC Taxsaver. I will need to withdraw 50 per cent of my investments after five years to fulfil a financial goal. The balance amount will be kept for retirement. I am targeting a corpus of Rs 2 crore. Am I right in keeping my SIPs going?
- Srinivas Ramagiri
Holding on to your investments was not a mistake. Never time the market. You think that you should have moved out late 2007 because the markets were said to be overvalued. But the same was said when the Sensex was at 9,000 or 13,000. It is only in retrospect that one knows when the market peaked.
Following is the analysis of your portfolio with recommendations:
- The portfolio constitutes of 16 funds that amounts to 272 stocks.
- You have eight funds that are predominantly large-cap oriented.
- You have three thematic funds and four other funds that have ratings below 3-stars.
Get rid of the clutter
Probably in the hope of being sufficiently diversified, you went overboard. Your current portfolio is a combination of a dozen diversified equity funds, three tax saving funds, one balanced fund and two direct stock investments. But more does not necessarily translates into smart diversification. Also, you have the additional burden of keeping track of funds.
Weed out some of the funds. Do away with the thematic and poorly rated funds. You have also invested in a closed-end equity fund, which has no past performance history. It should have been avoided. * Out of the 272 stocks in your portfolio, 246 have an allocation of less than 1 per cent. * Reliance Petroleum has an allocation of 13 per cent. * Your portfolio is heavy on theenergy sector with a 29 per cent allocation.
Avoid skewed allocations
Once Reliance Petroleum and Reliance Industries get merged, this will translate into a very high allocation to a single stock. It's important that you do not let the portfolio take a tilt towards a single company or sector.
lMajor part of investments were made in 2005, in the latter half of 2007 and early 2008.
Stay consistent and disciplined
Stick to the SIP. Buying at different levels helps in averaging out the costs. It also helps you stay detached from the market ups and downs.
- You don't have a meaningful fixed income allocation
Increase debt allocation
A portfolio must have a mix of equity and debt (fixed income). Equity investments are meant for the long term, a period of more than five years. For money needed before that, investments must be made in fixed return instruments since it is less risky. A fixed income allocation also helps curb volatility.
- Your current SIP of Rs 33,000 per month is insufficient to reach your retirement goal of Rs 2 crore
Solution: Increase your SIP
Your current investments, valued at Rs 22.3 lakh, and the ongoing SIPs of Rs 33,000 will be worth Rs 1.78 crore in 13 years at an annualised return of 10 per cent. This means a shortcoming of Rs 22 lakh for your retirement corpus. An investment of Rs 40,000 per month in good equity funds should do the job. If you cannot afford such a SIP, ensure that you save sudden windfalls like a bonus towards retirement.
Action Points
- Your new portfolio for the retirement should ideally have six funds, which you can select from the options below.
- Diversified equity funds: Magnum Contra, HDFC Top 200, DSPBR Equity
- Tax saving funds: HDFC Taxsaver, Magnum Taxgain, Sundaram BNP Paribas Taxsaver
- Aggressive equity fund: Kotak Opp DWS Investment Opp.
- Income fund: Kotak Flexi Debt, Canara Robeco Income
- Decide on an equity-debt allocation. And increase the debt allocation by 10 per cent every three years.
- Rebalance your portfolio to maintain the allocation. As your goal approaches, sell equity and channelise the cash to debt. Also keep the tax implications in mind.
- Even after you retire, it is important to keep some money in equity funds so that the portfolio does not give negative inflation-adjusted (real) returns.
- As you plan to withdraw 50 per cent of your investment after five years, it should be done in a systematic way. The money withdrawn should be invested in debt funds as you reach closer to your goal. You can create a separate portfolio for this.
