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Reducing Volatility In Your Portfolio

| 6/14/2012 9:00 PM Thursday

Q: I have an SIP for investments in HDFC and DSP. These are long-term savings meant for my son’s education, which is a goal that is nine years away.

Current Investment Portfolio

Fund Name

Amount Invested P.A. (Rs)

HDFC Equity Fund

76000

Tata Infrastructure Fund

8300

DSP Blackrock Equity Fund

42500

Given the state of the market, I am suffering losses on my portfolio and am not sure of how I should proceed. Please advise me as to whether I should continue with my current investment plan or make any changes. Are the funds I am invested in good ones?

- Sunil Mehta, Bangalore

A: Always start from the aerial view. You presently have zero allocation to debt and 100 per cent to equity. That is what is called ‘aggressive’ allocation. In equity, the funds you are invested in are what are called diversified Multi-Cap funds, meaning that they hold a mix of Large-Cap and Mid-Cap stocks in their portfolio. The presence of Mid-Cap stocks may often add volatility to the fund’s NAV, as has been the case in recent times.

The other major influence on your portfolio is the infrastructure fund, which has been a miserable sector to be in since 2008. However, if the government ever wakes up, as it seems to be doing of late, then the sector could recover quicker than was initially expected. It is irrefutable that our country has an infrastructure deficit, and since the Plans have allocated billions of rupees for developing infrastructure, this should be a good segment to be present in. When such high-risk investments are present, they are easier to manage if held in a small proportion. Averaging or adding at beaten down values becomes possible, and absorbing losses is also not as painful. In fact, any sector fund has the typical attributes of stellar performance for a few years and a sharp fall on any signs of weak growth.

One way to add stability to your portfolio is to add debt funds. If situations like the present one worry you, it means that your ability to tolerate risk is not as high as you thought it was. It is not a bad idea to have 25-30 per cent debt funds in your SIP. If you are smart, you could even use this as a reserve to buy equity in lump sums when opportunities of beaten down values present themselves.

Another way to reduce volatility in the portfolio is to add some purely Large-Cap funds such as DSP Blackrock Top 100 or Franklin India Bluechip Fund. You could easily allocate between 30-50 per cent of your equity allocation to Large-Caps.

The main component of your portfolio, HDFC Equity Fund, is aggressive at times due to its Mid-Cap holdings, but a good performer in the long run. The DSP Blackrock Equity Fund too is a fund with a relatively high standard deviation due to the large presence of Mid-Cap stocks in its portfolio, but a good above average long-term performer. You should retain these funds but also diversify into Large-Cap funds to reduce volatility. If the idea is to have very low volatility among equity options, replace these funds with low sigma funds such as UTI Dividend Yield, Birla Sunlife Dividend Yield or the MNC funds from the same AMCs.

Performance As On 6th June, 2012

Scheme Name

Absolute (%)

Compound Annualised (%)

3 Months

6 Months

1 Year

3 Years

5 Years

BSE SENSEX

-4.19

-2.09

-10.64

2.89

2.91

HDFC Equity(G)

-4.22

1.95

-11.3

11.67

9.06

DSPBR Equity-Reg(G)

-4.09

1.18

-8.51

9

NA

Tata Infrastructure(G)

-7.98

-2.35

-18.09

-3.83

0.16

DSPBR Top 100 Equity-Reg(G)

-4.84

1.19

-5.72

7.65

8.33

Franklin India Bluechip(G)

-5.15

-0.96

-6.47

9.46

7.83


Performance As On 6th June, 2012

Scheme Name

Annualised (%)

1 Month

3 Months

6 Months

9 Months

1 Year

Birla SL Dynamic
Bond-Ret(G)

9.77

10.04

10.49

9.77

10.68

 

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