Grow Your Investments & Limit Downside Risk

I had subscribed to Tata Infra-Dividend Yield and Reliance Vision Fund in September 2009 for SIP amounts of Rs 2000 per month, but stopped investing in these in February 2012 due to their poor performance. Please suggest whether I should redeem or hold or invest in either or both again. Besides these funds, I have also invested in the funds as listed below. Please suggest necessary measures for me to create better wealth in the coming five years.

- Suma Reddy

Based on the frequency of SIPs and the inception dates of your investments, your current allocation appears to be similar to the one shown in the pie chart. I have assumed that you invest in SIPs after the first week of every month. I would classify your portfolio as ‘aggressive’, as you have about 80 per cent invested in equities and the remainder in gold.

Currently, 20 per cent of your portfolio is invested in gold. If you want gold in your portfolio for diversification or as a hedge against inflation, you can now stop your SIP in Reliance Gold Fund. On the other hand, if you plan to accumulate physical gold, you could continue investing in the fund till you reach your target allocation.

The majority of your equity investments comprise large-cap funds (HDFC Top 200 and ICICI Prudential Focused Bluechip). These funds generally invest in the shares of companies with strong fundamentals. You should continue investing in these two funds, as they are among the top performers in their category.

ICICI Pru Focused Bluechip invests the majority of its corpus in about 25-30 large-cap stocks. In contrast, HDFC Top 200 has a broader universe – the BSE 200 index. Based on the risk-adjusted returns, ICICI Pru Focused Bluechip has consistently been in the top quartile (100 per cent) on a three-year basis and HDFC Top 200 has been in the top quartile 67 per cent of the time. This is probably because the latter had a relatively higher exposure to PSU banks. The shares of PSU banks have struggled recently until the reforms were announced on 14th September, 2012.

On a long-term basis, both funds have outperformed the Sensex, as shown in the table.

You have invested almost 20 per cent of your portfolio in Reliance Vision, which is a multi-cap fund. Your decision to stop investing in this fund was wise, as it has underperformed other multi-cap funds on a one-year, three-year and five-year basis. Also, Reliance Vision fund was not in the top quartile over a three-year period. On a five-year basis, the fund was in the top quartile only 10 per cent of the time. You could redeem your investment in Reliance Vision and allocate this to the other multi-cap funds. Both these funds have outperformed Reliance Vision. ICICI Pru Dynamic Fund will serve as a cushion to your portfolio, as the fund invests a portion of its corpus in debt instruments when the equity markets appear to be overvalued. Based on the three-year risk-adjusted returns, ICICI Pru Dynamic has outperformed its peer-group as it was in the top quartile 92 per cent of the time.

You can continue investing in Birla Sun Life Dividend Yield Plus as this a relatively conservative small & mid-cap fund. Generally, these funds are subject to higher liquidity risks than the large or multi-cap funds. However, Birla Dividend Yield Plus invests in shares of high dividend-yielding companies. These companies usually have stronger financials than those with lower dividend yields. Dividend yield funds may not generate spectacular returns in a bull market but are less volatile than other small and mid-cap funds, particularly in a falling market. These funds usually have lower downside risks than the more aggressive small & mid-cap funds. Birla Sun Life Dividend Yield Plus also has a lower downside risk than some multi-cap funds. Additionally, the fund’s downside risk is comparable to that of HDFC Top 200, a large-cap fund.[PAGE BREAK]

Overall, 17 per cent of your portfolio is invested in Tata Infrastructure Fund. Infrastructure funds generally invest in cyclical stocks that are linked to economic growth. Over the last few years, infrastructure stocks have underperformed the broader indices. This was because of slowing domestic growth, high interest rates and the government’s policy paralysis.

The outlook for infrastructure stocks is now more positive as the government has implemented several reforms to boost economic growth. But remember that infrastructure funds have concentrated portfolios and are relatively more risky than diversified equity funds. In any case, if you are comfortable about volatility, you could have a maximum of 10 per cent of your total portfolio invested in Tata Infrastructure Fund.

You could rebalance your portfolio so that the bulk of your money is invested in large and multi-cap funds as indicated in the table.

You can reduce your investment in Tata Infrastructure from 17 per cent of your portfolio to 10 per cent and continue the SIP in ICICI Pru Focused Bluechip Fund. You can start a new SIP in ICICI Pru Dynamic Fund. This will ensure that more than half your portfolio (around 55 per cent) is invested in large and multi-cap funds. The bulk of your portfolio (70 per cent) will be invested in diversified equity funds, which will reduce the sector risk in your portfolio. You will also have a relatively larger percentage invested in conservative funds like ICICI Pru Dynamic and Birla Sun Life Dividend Yield Plus. These funds will help protect your portfolio in a bear market. This allocation will help you grow your investments and simultaneously limit downside risk. If you have already reached your target allocation of gold, you could consider redeeming some of your investments in Reliance Gold Fund and investing 10 per cent of your portfolio in debt mutual funds for additional safety and diversification.