Fund Talk

I am a regular investor in mutual funds and earned a decent profit on redemption of almost all funds excepting some thematic funds. Now I have set a goal to build a targeted corpus of Rs 1 crore through SIPs. I would like to do so over a period of 15 years by investing Rs 20,000 p.m. for my son, who is 23 years old. Will it be possible? I have already invested in the following funds through SIPs of Rs 1,000 per month. They are 13 months old.

HDFC Growth, HDFC Equity, HDFC Top 200, HDFC Mid-Cap Opportunities, Reliance Regular Savings Equity, Reliance Equity Opportunities, Sundaram PSU Opportunities, Tata Equity PE fund, Morgan Stanley Growth, Morgan Stanley ACE Templeton Growth, ICICI Pru Dynamic, IDFC Premier Equity Plan A, DSP Micro Cap, Birla Dividend Yield Plus and Quantum Long Tem Equity Fund. I have a plan to add Fidelity Equity, Franklin Bluechip, HDFC Prudence and ICICI Pru Discovery Fund. I am an aggressive investor. I have expertise to track the mutual fund performance through portfolio trackers in various websites. Kindly give your comments and suggestions.

T. Balalsubramanian

Chennai

If you can invest Rs 20,000 every month over the next 15 years, a target of Rs 1 crore at the end of the period certainly seems achievable. Your investment needs to earn a return of just 12 per cent per annum on a compounded basis, to get you to that target. Remember that the Sensex itself has managed a 13 per cent compounded annual return in the last five years. The funds you own have fared much better and have generated an annual 18 per cent return.

Despite your ability to monitor your funds regularly, we think your portfolio is too large. Given that each equity fund would in turn invest in 15-30 stocks, owning a portfolio of 16 funds would result in your owning a very large universe of stocks, with plenty of duplication too. That would offer no diversification benefit and may actually weigh on the returns on your portfolio. We would therefore suggest the following changes to your existing holdings:

Streamline your portfolio to about 10-11 funds by switching out from the following. Morgan Stanley Growth Fund, for its sluggish five year returns, Morgan Stanley ACE for lack of track record, and Reliance Regular Savings Equity for its underperformance of its category for one and three years. In the interests of making your portfolio more compact, you may also switch from HDFC Growth into HDFC Equity Fund, the latter being a better long-term performer.

Re-evaluate if you would like to hold thematic funds like Sundaram PSU Opportunities, DSP Microcap and ICICI Pru Discovery. These may require you to follow an active strategy of booking profits after the theme has made exceptional returns.

Add two passive funds to your portfolio. That will improve your chances of matching the index returns over the long term, especially as our analysis shows a trend of fewer actively managed funds beating the indices. We would suggest Benchmark S&P 500 Fund and Franklin Templeton Nifty Index Fund to start with.

Given that your investment plan is for a 15-year period, we suggest you invest only in index or diversified funds and not thematic funds for your new SIP of Rs 20,000 a month. If you opt for index funds the funds mentioned above are a good choice. If you would like to go with diversified funds, you could start the SIP with investing additional sums in funds such as HDFC Top 200, Birla Dividend Yield Plus, Templeton India Growth, Quantum Long Term Equity and ICICI Pru Dynamic from your existing portfolio. Though the new funds you suggest are good ones, they would add to the numbers in your portfolio.

It is certainly a good thing that you maintain active track of how your equity funds are performing. Our analysis ‘Reshuffle your equity fund portfolio', on page 5, shows that there can be substantial churn in the equity fund rankings over every three or five years. It's best to check on your portfolio twice a year and replace funds that trail their benchmarks over a three-year period.

Given that you can invest Rs 20,000 a month towards your goal there is a high possibility that you may reach your targeted corpus of Rs 1 crore much ahead of the planned 15 years. In case that does happen, do switch out your investments from equity funds and move to safer investments that can shield your capital.

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