Fund Talk

I am 49 years old and a senior executive in a multinational company. I am quite aggressive in risk taking and want to build a corpus of Rs 3 crore from mutual funds by the time I am 60. I hold Birla Sun Life Dividend Yield Plus, HDFC Liquid Fund, HDFC Floating Rate Income Fund Long Term Plan, HSBC Equity, ICICI Pru Discovery, ICICI Pru FMCG, IDFC Dynamic Bond, IDFC Sterling Equity, Reliance Gilt Securities, Reliance Gold Savings Fund and Sundaram Select Midcap.

I have the following SIPs: Rs 20,000 each in HDFC Top 200 and HDFC Equity, Rs 30,000 a month in IDFC Dynamic Bond and Rs 10,000 a month in HDFC Prudence.

Do I need to make changes to my portfolio? Also, if I need to invest a bulk amount of, say, Rs 2 lakh at any time, which debt and equity funds would you suggest given my target at the age of 60?

R Shankar, Pune Your target does seem aggressive. But you do have a high monthly saving and have said that your risk appetite is high. We will, therefore, try to improve your returns by increasing your contribution to some midcaps. The proportion of equity to debt, though, can remain the same as now, at 70:30 respectively.

Your current holding does not reflect your risk appetite. Hence we will have to rejig it. But before that, do make a note that we would like you to start exiting equities nine years from now, which is two years ahead of your retirement. Market turbulences can hit a retirement kitty badly. We also assume that you have other avenues of investment.

Let us first look at your debt funds. You have close to 8 per cent in liquid/floating rate funds. That is a little high as these funds are best used as short-term options. We suggest you hold HDFC Floating Rate alone and exit HDFC Liquid.

Consider exiting Reliance Gilt Securities and IDFC Dynamic Bond Fund. The former's return in the last three years is not top notch. While gilt funds can be expected to return well when interest rates fall, they will also underperform during periods of interest rate hikes. Gilt funds, therefore, require a more active approach and typically are sought for capital appreciation in the short-to-medium term. They may or may not beat inflation.

Instead, shift this sum to HDFC MIP Long Term. This fund has a steady record. Its exposure to equities to the extent of 20 per cent will also help pep up returns.

IDFC Dynamic Bond has done well in the last one year. However, we suggest you switch to IDFC SSI Medium Term Plan A. This fund holds a slightly superior return record.

Equity funds

Among your equity funds, hold Birla Sun Life Dividend Yield Plus, HDFC Prudence, HDFC Equity and ICICI Pru Discovery. Exit Sundaram Select Midcap. You can hold a more aggressive midcap fund, given your high target. Exit HSBC Equity and IDFC Sterling Equity. Their return is not top notch and we would prefer that you hold a fund with slightly higher risk and return profile. Stop further SIPs in HDFC Equity and just hold it. The fund value now accounts for over a third of your total portfolio. That is too high an exposure to a single fund.

Exit HDFC Top 200 as we would also like you to reduce exposure to a single fund house. ICICI Pru FMCG will require active tracking of the sector. Unless you know the sector well, we suggest you exit it.

Redeploying funds

What would you do after exiting these? You simply redeploy them. From the funds that we asked you to exit, you will have around Rs 5.9 lakh. This can make up for Rs 10,000 a month of SIP for the next five years. With this, you will have Rs 90,000 a month of SIPs. Hopefully, after five years, you can actually ramp up your savings and keep them at this level.

Of that, deploy Rs 20,000 in IDFC SSI Medium Term Plan A, Birla Sun Life Dynamic and the gold fund you hold as SIPs, with least allocation to gold. We assume these funds will yield 8 per cent per annum over the next 11 years. This, together with the lump sum investment you make in HDFC MIP Long Term (assuming a 9 per cent per annum return), will provide you sufficient exposure to debt.

The remaining Rs 70,000 a month of savings can be deployed as follows: Rs 20,000 each in IDFC Premier Equity and Quantum Long Term Equity and Rs 10,000 each in HDFC Prudence, ICICI Pru Discovery and Canara Robeco Diversified. By doing this, 40 per cent of your equity investments will be to midcap funds. This is risky, but necessary to generate the asking rate.

Midcap funds should generate 20 per cent per annum for the risk they expose you to. Do review their performance annually. We hope the other equity funds will generate 15 per cent returns and the debt funds 8-9 per cent. After nine years in equity funds, shift them to any safe debt avenue such as bank deposit that will provide at least 7 per cent return a year for the next two years.

With these strategies, you may be able to touch Rs 3 crore. But much hinges on the midcap funds' ability to deliver 20 per cent annually. Three years from hence, review their performance. If they return, say, 16 per cent per annum, you will have to up your stake by another Rs 15,000 a month in the mid cap funds for the remaining six years. But remember, your risks will stand enhanced too. Starting late, therefore, poses these kinds of uncertainties.

The lump sum of Rs 2 lakh can be invested in a debt-oriented fund FT Life Stage Fund of Funds 40s. We have not taken this for your Rs 3 crore target as it is not clear if you will invest this sum. The equity exposure you get through the suggested portfolio should suffice.

(The recommendations made in this column address the readers’ query, based on their risk profile and requirement. They may not be applicable to all investors.

Queries may be e-mailed to >mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.)

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