I am a 43-year-old doctor working in the private sector. I started monthly SIPs in May 2008 in the following funds: Rs 1000 in DSPBR World Gold, Rs 8000 in Reliance Regular Savings Equity and Rs 5000 in Reliance Growth and Reliance Infrastructure. When the market started declining, I stopped SIPs in Reliance Growth and Reliance Infrastructure in February 2011. In the same month, I started SIPs of Rs 5000 each in the following funds: IDFC Premier Equity, Reliance Equity opportunities, HDFC Equity, ICICI Pru Discovery and Reliance Gold Savings. Starting May 2011, I added Rs 5000 each in HDFC Prudence, HDFC Top 200, HDFC Children's Gift Fund, Quantum Long term Equity, Templeton India Growth fund and Fidelity equity. I don't have any target but expect 15 per cent capital appreciation. I plan to invest over the next 10 years. I feel there is duplication in my portfolio and it is overweight on large-caps. Please comment on my choice of funds and suggest changes if required. How can one judge whether a particular fund is not doing well and what should be the strategy at that point: stop SIPs or stop and switch? Can we, during market dips, take such a call?

Prakash Kochi

Duplication of portfolio-holding is bound to happen when you hold too many funds. You do not need a large assortment of funds to build wealth. On the contrary, returns delivered by a portfolio of, say, 10 or more funds may turn out to be suboptimal, with the laggards pulling down the overall returns. Add a fund only if you feel that it is unique in terms of its investment style or the theme holds potential to deliver returns over the next three years.

We don't think you are overweight on large caps. You have only one large-cap focussed fund, HDFC Top 200. Others such as Fidelity Equity and Quantum Long Term Equity have a large-cap tilt but are not large-cap funds. However, your portfolio offers enough scope to reduce the number of funds.

Continue SIPs in HDFC Equity, Quantum Long Term Equity, IDFC Premier Equity, Templeton India Growth and HDFC Prudence. Do not stop SIPs in them merely because the market is in a downturn. You can also run SIPs in ICICI Pru Discovery and Reliance Equity Opportunities for 3-5 years with an annual performance review.

You can consider exiting Fidelity Equity and HDFC Top 200. While these are, no doubt, top-notch funds, an exit will be required to hold a more compact portfolio. HDFC Children's Gift fund can find a place only if you are specifically looking for debt funds. If you have sufficient debt exposure, shift this SIP to HDFC Prudence.

Reliance Regular Savings Equity tends to sharply underperform during volatile markets, such as the one in 2008 as well as the current one. Its performance, therefore, undergoes huge swings on a yearly basis. If you are seeking stability, you may be better off exiting this fund. Also exit Reliance Growth as your mid-cap need will be met by IDFC Premier Equity and ICICI Pru Discovery.

Reliance Infrastructure, like all other infrastructure theme funds, has been struggling to perform. We would not recommend theme funds, unless you can reasonably time your entry and exit in such funds by actively tracking the fortunes of the sector. A 10-year portfolio can do well without theme funds. You can restrict investment in gold to 8-10 per cent of your portfolio. If you are looking at gold as a diversification option, then go for gold ETFs that Reliance Gold Savings invests in. DSP BR World Gold invests in gold mining stocks and would be subject to stock market vagaries as well.

With these funds, your return target appears achievable.

When to stop SIPs

We shall move to your question on how to identify underperformance and what to do with SIPs in such a scenario. The first distinction you need to make is whether the market is in a down phase or your fund is.

In your case, you stopped SIPs in February 2011 stating market underperformance. That may not have been a prudent move. An SIP works best only if you buy units during the ups and downs of the market.

The down-market phase is vital to average your costs as you buy units at lower prices and bring down your overall capital cost of the fund. For instance, the NAV of Reliance Growth was Rs 504 at the beginning of January 2011. You stopped SIPs in February, post which NAV fell to as low as Rs 399 per unit beginning October. By stopping SIPs you have curtailed the rupee-cost averaging process that is unique to SIPs.

Of course, in your case, it so happens that the funds for which you have stopped SIPs are not currently the best performers. Hence you do not lose much.

To make a long story short, do not stop SIPs citing market decline as long as the fund performance is not off mark. In general, first look at your fund performance vis-à-vis its benchmark. If the fund has underperformed its benchmark by over 5 percentage points for a period of 12-18 months you should not only stop SIPs but exit the fund in a phased manner. As a next step, if the fund has been underperforming its category average (although beaten its benchmark) by 10 percentage points or more, stop SIPs and watch for six months. Further slip-ups need not be tolerated.

In both the above cases, switch the SIP to a good performer that you already hold, unless you are nearing your goal.

In general, there are a number of parameters (that we discuss in our fund recommendations) to assess performance. But if you are a passive investor, this is the simplest way to take a call.

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