I am 32 years old and work in a public sector company. I have postal savings and bank deposits. In November 2007, I invested a lump-sum in equity mutual funds. Recently, when I analysed the returns and performance of my investments, it was a negative 11 per cent. I am invested in Franklin Templeton High Growth Companies, Franklin Templeton Asian Equity, SBI Comma, Magnum Contra, Magnum Multiplier plus, Tata infrastructure, Kotak Indo World Infra, UTI infrastructure, Birla Infrastructure, Canara Robeco Infrastructure, ICICI Pru infrastructure, Reliance diversified Power Sector, Reliance Natural Resources, Reliance Growth, Birla Midcap, Birla Tax Relief 96 fund, Birla equity fund, Sundaram Capex Opportunities, Sundaram Select Focus, Sundaram Midcap, Sundaram Energy Opportunities and DSPBR World Gold.I plan to start an SIP for Rs 10,000 per month in four top-performing funds to create a sizeable corpus at the age of 50. I have learnt a few lessons. They are: necessity of periodic review, reshuffling and replacing a poor performing fund every year with a good one, take up SIPs 6 months at a time to enable reshuffling, importance of gold funds, avoid theme funds and hold a small portfolio of say five top rated funds to track with ease. Please provide your comments and suggestions.

Krishna Kumar

Tiruchi

It is good to see that you have taken the time to review your portfolio and come up with a list of lessons learnt. As you may have figured for yourself, it is the excessive exposure to theme funds that has led to your portfolio sporting dismal returns. And your choice of holding a chunk of your money in a single theme — infrastructure — which happens to be among the worst performing sector in recent times, has hurt your portfolio.

Lesson 1 : hold diversified funds and invest only a small portion in theme funds, that too, if you have conviction in that theme and can track it.

Your surmise on periodic portfolio review is right. However, reshuffling every six months or one year may not help. For one, SIPs may lag over short periods of time, especially in a rallying market, when you buy additional units at higher NAVs.

This does not necessarily mean that the fund is underperforming. When you review every quarter or half-year, analyse the performance and make note of the underperformers. If the fund continuously struggles to beat its benchmark for a year or so, then an action may be warranted.

You also stated that you wanted to hold a compact portfolio of five top funds. This is good; However, do not constantly chase top funds – look for consistent performers than those that hit the toppers' chart every year.

Lesson 2 : SIPs work over a fairly long period. Reshuffling based on short-term scorecard may disturb portfolio performance.

The underperformance of your equity holdings has led you to believe that gold funds play a significant role in your portfolio. True, gold would be among your best asset class in terms of returns. However, over a longer time frame, gold has seldom outperformed equities.

Even assuming that the increased demand for gold (with more ETF participation) would drive returns, this metal has in recent years shown high volatility and hence timing entry has become the key to returns. We suggest you allocate a small portion of your money, say 10 per cent, to gold as a means of diversification if your objective is to build a corpus over long term.

Lesson 3 : Gold can at best be viewed as a diversifier, despite its recent high-voltage performance. Use SIPs to ward off volatility in this asset class.

Reduce theme funds

Now moving to your portfolio, despite sitting on losses, we suggest you exit most of the infrastructure funds that you hold as you are unnecessarily duplicating your portfolio and increasing its risk profile. Hold on to Canara Robeco Infrastructure and Sundaram Capex Opportunities. Exit the rest to avoid duplication and cap exposure.

Exit Magnum Comma as Indian stocks are not the best bets on commodity. Exit the other diversified funds as they cannot form the core of your portfolio. Add HDFC Equity, Quantum Long Term Equity, ICICI Pru Discovery and UTI Master Value through SIPs. Add ETFs Benchmark Nifty BeES and Junior Nifty BeES on every fall of 5 per cent or more in the respective indices. These two, would allow you to buy blue chips and emerging blue chips respectively.

DSPBR World Gold is not a gold ETF, it is an equity fund that invests in gold mining companies and would undergo the volatility linked to equities. If you are looking for gold commodity exposure, buy any of the gold ETFs.

You hold over 70 per cent of your funds in post office savings and fixed deposits. Given that you have another 18 years to go to achieve your corpus, you should shift a good portion of your debt, such that you have a 60:40 equity to debt ratio. After 10-12 years, you can reduce the equity component and increase debt.

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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