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Equity-Debt Balance In Investing

| 4/5/2012 9:00 PM Thursday

Q: I am an NRI living in Europe having some financial engagements in India for about 15 years (direct equity trading through a broker in India and investments in mutual funds, both on a repatriable basis, as well as some investments in land properties). I am a bank employee working in Asset Management.

Mutual Fund Holdings

Purchase Details

Fund

Date Of Purchase

Invested Amount

HDFC Equity Fund Dividend

16.08.2007

700,000.00

HDFC Prudence Fund (G)*

23.06.2006

1,176,643.57

ICICI Prudential Balanced Fund

17.10.2011

1,000,000.00

UTI Balanced Fund (G)

23.06.2006

700,000.00

Birla Sunlife ‘95 Fund (G)

24.03.2010

550,000.00

Reliance Regular Savings Balanced (G) Fund

23.03.2010

500,000.00

Equity Fund Holdings

Purchase Details

Stock

Date Of Purchase

Invested Amount

Bajaj Finance

17.10.2011

210,132.00

Syndicate Bank

17.10.2011

211,740.00

Bharat Forge

 06.03.2012

202,176.00

Cummins India

 06.03.2012

200,022.00

Godrej Consumer Products

06.03.2012

204,075.00

Hero MotoCorp

06.03.2012

188,411.40

State Bank of India

06.03.2012

225,707.35

Tata Steel

13.02.2012

347,884.50

HDFC

13.02.2012

198,910.25


- Mathew

A: Your current investments are distributed in an approximate asset allocation of 30 per cent debt and 70 per cent equity. The presence of debt is a result of the balanced funds that constitute a majority of your mutual fund portfolio, as by their very nature they comprise a mix of debt and equity in an allocation of 35 per cent and 65 per cent respectively. Your existing style of investing and portfolio mix can be classified under the moderate/aggressive profile.

Asset allocation is determined by a number of factors based on the investor’s life cycle, where age, occupation, financial needs, financial goals, an appropriate time horizon for investments, risk taking ability, etc. are taken into consideration.

Consider a conservative investor’s case. Say, an older investor having financial goals like retirement plans, children’s education and marriage that need to be fulfilled after a longer investment horizon. Such a profile may possess an asset allocation with 20-30 per cent equity and 70-80 per cent debt exposure, or even an entirely debt-oriented portfolio having the bare minimum risk. Here, the rewards/returns would also be conservative. Also, it can be moderated to a 50 per cent debt:50 per cent equity if a certain amount of returns need to be achieved in a short span of time. This would slightly accelerate the growth on the portfolio returns, and yet preserve a sense of stability. For an aggressive investor, the purpose of the portfolio can simply be to invest and maximise the long-term growth of capital, having the tolerance to witness negative returns through various performance cycles in the market.

Based on these factors, an asset allocation can be derived depending on your profile and your future financial needs. Owing to insufficient information on your profile, we have classified your investment style as moderate-aggressive, with a 30 per cent debt:70 per cent equity asset allocation. We have also recommended the funds suitable for this risk profile.

Your portfolio can have a balanced mix of funds that are stable and aggressive in nature. Among the equity schemes, HDFC Equity is an aggressive fund in the Diversified/Multi-Cap category. This is a consistently outperforming fund vis-à-vis its benchmark, and is managed by an excellent fund manager, Prashant Jain. Although, the fund can witness brief periods of volatility in the short term, in the long run it is expected to deliver better risk-adjusted returns over its benchmark S&P CNX 500 as its track record suggests. Hence, this fund should be retained in your portfolio.

Instead of exposing your portfolio majorly to balanced funds, the HDFC Prudence Fund can be retained while the remaining funds can be redeemed and redeployed in equity. You can divert the funds to the diversified Large-Cap category and also to pure debt funds, depending on your liquidity. Currently, the debt markets in India are doing extremely well given the interest rate scenario being at its peak which in turn translates to attractive yields on debt products.

Large-Cap funds invest in qualified blue chips with greater probability of delivering stable returns. The ICICI Prudential Focused Blue Chip Equity Fund and the Franklin India Blue Chip Fund have maintained steady track records in their performance, and are relatively less aggressive in nature. For a short investment horizon, Templeton India Low Duration Fund is a good investment option in debt, with a high yield to maturity of 11.51 per cent and a modified duration of 0.19 years. For the long and medium term, Templeton India Corporate Bond Opportunities Fund is a suitable option, with a yield to maturity of 10.75 per cent and a modified duration of 1.56 years. These funds would provide liquidity and a safety cushion, with higher post-tax returns.

If you wish to add a minor kicker of returns, your portfolio can enter into the Small- and Mid-Cap space by investing in the IDFC Premier Equity Fund, again and outperformer in the category.

 

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