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Balance Equity And Debt In Your MF Portfolio

| 8/9/2012 9:00 PM Thursday

Q: I am a 39-year old high school teacher in Kerala and my wife is a higher secondary school teacher. We are both government employees. We have two daughters, who are 8 years old and 5 years old respectively. I request you to give me your opinion about my mutual funds portfolio (SIP) for long-term investment.

In addition to these, I had started investing in HDFC Tax Saver Fund (Growth) at Rs 1000 per month two years ago, but stopped after a period of 8 months, which amounted to a total investment of Rs 8000. This has not been redeemed yet as the lock-in period is three years.

S. No.

Company

Investment Duration

Monthly Contribution (Rs)

1.

Franklin India Blue Chip Fund (Growth)

4 years

1000

2.

HDFC Equity Fund (Growth)

1 year

1000

3.

HDFC Top 200 Fund (Growth)

1 year

1000

4.

Reliance Equity Opportunities Fund (Growth)

1 year

1000

5.

Reliance Gold Savings Fund (Growth)

1 year

2500


I would like to add one or two SIPs (Rs 1000 per month) to my portfolio. Kindly suggest the names of two suitable funds for this purpose.

Kindly advise me on my investments. I look forward to your valuable suggestions.

- K. S. Kiran, Edathiruthy, Kerala

A: You have picked a fairly good bunch of funds for your investments. I am sure that you are pleased with the performance of your portfolio so far.

I do note that they are all equity funds and no debt funds. Also, the one that queers the pitch is the gold fund. Presently, the gold fund forms close to 40 per cent of your monthly investments, which is more than what one would normally recommend. Going by the kind of economic uncertainty the entire world is faced by, gold is likely to be considered a safe haven for some more time, but its unpredictable nature does not allow one to make confident long term predictions. However, I think you should view it in a slightly different perspective than would investment analysts. Considering that you have two daughters and in view of Indian families’ habit of accumulating gold for children, I would urge you to look at your investment in gold ETFs as an accumulation strategy and not as a pure investment strategy.

Similarly, it makes sense to view your investments from a need-based perspective to clarify the strategy to be used. To illustrate, I have made a set of calculations assuming that your goal is to have sufficient funds saved for the payment of fees/donations to support your children’s education in a good professional college.

Education is becoming more and more expensive by the day. Assuming a higher rate of inflation than normal, the table shows the amount of money that may be required by the time your children are 17 years old and ready to pursue their graduate education.

I have assumed that it will do you good to have 40 per cent debt in the portfolio instead of having a 100 per cent equity portfolio. The SIP calculations have been made on that basis. In the event that you find the SIP commitment too high to make every month, you can follow the incremental approach, where you start with the SIP shown in the last column of the table and increase the quantum by 10 per cent every year as your income grows.

Estimated Cost Of Goals

 

Present Cost (Rs)

Years To Go

Estimated

Future Cost (Rs)

SIP (Rs)

Incremental SIP (Rs)

Child 1

1000000

9

2400000

12500

8600

Child 2

1000000

12

3100000

9600

6000

 

Total



22100

14600

The table has recommendations for a more conservative portfolio than the one you are following, given the immense uncertainty facing the global economy. (Of course, changes to the portfolio can be made any time based on the circumstance or by watching this column.) When the portfolio is being regularly monitored, one can take a more aggressive stance, but in your situation, I think this is the better path. You should take a greater risk and increase equity only if you think that there are sufficient assets to back you up even if the portfolio does not do well.

Portfolio Allocation

Fund Name

Debt (%)

Equity (%)

Birla Sun Life Dynamic Bond Fund

20

 

Templeton India Corporate Bond Opportunities Fund

20

 

FT India Dynamic PE Ratio Fund of Funds

 

20

HDFC Equity Fund

 

20

UTI Dividend Yield Fund

 

20

 

40

60

Of your funds, HDFC Equity and Reliance Equity Opportunities Fund have portfolios that straddle stocks across capitalisation because of which they tend to be more volatile than the others in your portfolio. HDFC Equity, of course, has the longer track record. Of the two larger cap funds, Franklin Bluechip is more consistent and has a higher Sharpe Ratio.

Equity Funds - Performance As On 3rd August, 2012

Scheme Name

Absolute

Compound Annualised

3 Months

6 Months

1 Year

3 Years

5 Years

BSE MIDCAP

-2.60

0.44

-10.48

2.12

-1.67

BSE SENSEX

0.27

-2.31

-4.13

2.60

2.58

Franklin India Bluechip(G)

1.37

0.20

-0.47

9.34

7.53

HDFC Equity(G)

-1.34

0.63

-7.18

10.75

8.80

HDFC Top 200(G)

-0.76

-0.17

-4.72

7.92

9.74

Reliance Equity Oppor-Ret(G)

1.04

8.68

3.62

19.28

10.26

Reliance Gold Savings Fund(G)

2.18

4.07

24.28

NA

NA

HDFC TaxSaver(G)

-2.37

-0.49

-7.57

9.70

6.05

FT India Dynamic PE Ratio FOFs(G)

1.88

1.82

3.85

7.63

9.10

UTI Dividend Yield(G)

1.96

0.87

-2.61

11.26

11.63

Debt Funds - Performance As On 3rd August, 2012

Scheme Name

Compound Annualised

1 Month

3  Months

6 Months

9 Months

1 Year

Birla SL Dynamic Bond-Ret(G)

12.13

10.35

9.71

10.83

10.21

Templeton India Corporate Bond Opp(G)

12.24

10.67

10.68

NA

NA

 

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