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You do not need too many funds in a portfolio to achieve diversification

LiveMint logoLiveMint 07-06-2017 Srikanth Meenakshi

I am 30 years old and relatively new to investing in mutual funds. I have invested Rs27 lakh in the following schemes in July 2016. My plan is to stay invested for at least 5 years.

Canara Robeco emerging equities, Franklin Templeton India Smaller Co. Fund Growth, HDFC High Interest Dynamic Growth, ICICI Value Discovery Fund Growth, Kotak Mahindra Select Focus Fund Growth, Principal Emerging Blue-chip Growth, SBI Blue-chip Regular Plan Growth, Axis Regular Saving Growth, Axis Income Fund Growth, Birla Sun Life Equity Fund, SBI Magnum Multi-cap Fund.

I plan to purchase two new funds—L&T India Value Fund and Mirae Asset Emerging Blue-chip. Are these good investments keeping in mind that I don’t have immediate cash requirements and want to invest very aggressively.

Apart from this I have invested in: HDFC ULIP (pro growth plus) for 15 years and have paid three instalments of Rs3 lakh each; HDFC insurance (Sanchay) for 15 years (premium is payable for 7 years) and have paid four instalments of Rs1 lakh each. I was late to Public Provident Fund (PPF) and only started it last year—I have done two instalments of Rs1.5 lakh each. Additionally, I have Rs50 lakh in fixed deposits, which I want to invest somewhere else. Please tell me what to do.

—Name withheld on request

For a person who is just starting to invest in mutual funds, you have selected quite a few funds to invest in. You are presently investing in a total of 11 funds, of which 3 are mid-cap funds, 5 are diversified equity funds, and 3 are debt funds. Since I do not know the amount invested in each, I cannot comment on the asset allocation that you have employed or the risk level of the portfolio. I would not advise that you invest in two more mid-cap funds (both the funds you are suggesting belong to this category). You can invest in your existing funds, especially the blue-chip or diversified funds if you would like to deploy more money. In fact, you would do well to reduce the number of funds in your portfolio to about five, or a maximum of six. You can accomplish this by consolidating the funds to one or two in each of the categories that you have invested in.

Regarding your other investments, I am not in favour of investing in Ulip products or any other investment-linked insurance product. Since you have your fixed-income investment covered between your PPF contribution and your debt fund investments, the Rs50 lakh that you have in fixed deposits can be brought over to your overall portfolio and invested proportionally in your existing funds. The key thing to remember is that one does not need too many funds in a portfolio to achieve the necessary risk and market diversifications.

I am 23 and my salary is Rs5 lakh per annum. I wish to invest in mutual funds through systematic investment plans (SIPs) as I wish to save for my wedding, which is 5 years away. As a first-time investor, can you suggest some funds to invest in? I can invest up to Rs10,000 every month. Without taking high risks, how much corpus can I raise?

—Greeshma Ganesh

Although you are a young person, given the time frame of your investment, you cannot take too much risk with your portfolio. I would recommend an approach where you invest in a portfolio that is equally split between equity and debt instruments. You can achieve that by using a combination of balanced funds (that invest in both equity and debt) and debt funds. Given that your are planning to invest Rs10,000 a month, you can invest Rs3,000 each in two balanced funds and the remaining Rs4,000 in a short-term debt fund. This will bring your overall asset allocation to 50% each for debt and equity. The benefit of using balanced funds is also that you can leave it to the fund manager to take advantage of market conditions when it comes to determining how much risk to take in the portfolio.

You can go with HDFC Balanced Fund and Birla Sun Life Balanced ’95 Fund for balanced funds and UTI Short-term income fund for the debt fund. You can expect to earn about 10-12% returns overall from your portfolio, which will mean you will have between Rs7 lakh and Rs9 lakh in your portfolio in 5 years.

The markets have gone up recently and are at all-time highs. Should I start investing in mutual funds through SIPs right now? Or should I wait for markets to fall? Can you explain how the market movements affect SIPs?

—Rohit Renjen

The beauty of systematic investing is that one does not have to worry about where the market is or what it is going to do to start investing. By virtue of investing periodically and regularly, investors can average out the cost of purchase of their mutual fund units—that is, they get more units when the price is down and less when the price is up. This would help the returns on the portfolio and remove one thing for the investor to worry about with regards to their investing pattern. So, to answer your question: no, you do not need to wait for the markets to fall to start your SIP plan.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

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