Reduce the number of funds for better results

PORTFOLIO MAKEOVER

I am a 77-year old retired businessman. I can invest directly in shares or mutual funds to the extent of Rs 50,000 per month. My ultimate objective is to will all my assets (fixed, investments in shares and mutual funds) to my two sons and daughter. I also plan to donate to family educational and charitable trust. Keeping my objectives in mind, could you suggest the right option for my mutual fund investments?

- Brahmdeo Mody

OBJECTIVE

 

 

To invest Rs 50,000 every month

To attain better tax efficiency

To will the entire investment to children and donation to a trust

OBSERVATIONS

 

 

15 mutual funds with 9 from HDFC

Good fund selection

22 stocks, with L&T having the highest allocation and most aving a miniscule representation

Significant large-cap orientation

THE PROBLEM

 

Lack of diversification: The mutual fund allocation is very biased towards one Asset Management Company (AMC) - 9 funds from HDFC Mutual Fund. The diversified sector accounts for almost 27 per cent of the total allocation. With 24 stocks, a number of them have a negligible allocation while one single stock, Larsen & Toubro, accounts for 23.23 per cent of the total stock allocation.

 

Clutter: There is no need to have 15 funds.A fewer number of well performing funds is more efficient and easier to manage.

 

Irregular investments: Lump sum investments are often made at irregular intervals.

 

Frequent churning of portfolio: This does no good to a portfolio. And, it increases the tax burden too.

THE SOLUTION

 

Consolidate: It will enable you to conveniently manage your investments. Invest in a few funds with a very good track record. Gradually move away from stocks and keep a portfolio of mutual funds.

 

Invest Systematically: In the long run, the investor benefits by investing regularly since the principle of rupee cost averaging comes into play.

 

Estate Planning: Since you are already very clear on where you would like your assets distributed, you should get it formalised. Draw up a will clearly stating your beneficiaries and who gets what share of each asset. You can state nominees for your current investments. For future ones, you can decide whom to put as a nominee. For instance, you can invest with three different folio numbers considering each child as a nominee.

 

Move out of FD: Fixed deposits attract higher taxes. Instead, invest in Fixed Maturity Plans and other short- or medium-term debt funds.

 

Rebalance: Keeping that in mind, rebalance your portfolio once a year. It will also ensure that the predetermined asset allocation is maintained. This will also curb the need to frequently churn your portfolio.

 

Invest in growth option: It is advisable to opt for the growth option of a mutual fund scheme unless your source of income is the dividend you receive. Or, unless it is a close-ended fund and you would like some return during the period your money is blocked.