Fund Talk: Avoid high exposure to passive funds: Business Line,

I am 38 years old and intend to retire in 13 years. I need Rs 65 lakh each (in today's value) for my children 12 years and 17 years from today. I have been investing primarily through SIPs for the last five years. I have debt investments for other goals.

Currently I hold Rs 22.4 lakh in domestic mutual funds and Rs 1.2 lakh in foreign stocks; 14 per cent of the total investments are in Nifty BeES, 13 per cent in IDFC Premier Equity, 12 per cent in HDFC Top 200, 10 per cent each in DSP BR Top 100 and Reliance Regular Savings Equity, 7 per cent in SBI Unit Plus II Pension, 6 per cent each in Goldman Sachs CNX 500 index fund and Reliance Growth, 5 per cent each in SBI Magnum Contra and ICICI Life Time Plus Pension.

I hold less than 5 per cent each in Kotak Opportunities, Sundaram Select Focus, DSPBR T.I.G.E.R, HSBC Equity and UTI Infrastructure. I currently have SIPs of Rs 10,000 a month in HDFC Top 200, IDFC Premier Equity and DSPBR Top 100. I also invest Rs 10,000 every month in Nifty BeES and Rs 2000 in ICICI Lifetime Pension. I can increase contribution to SIPs from 2015 and invest till retirement.

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I plan to sell my holdings in SBI Magnum Contra, Sundaram Select Focus, HSBC Equity and UTI infrastructure and invest the same in ICICI Pru Dynamic. I am undecided on smaller holdings such as DSPBR T.I.G.E.R and Kotak Opportunities. I plan to hold the rest of the funds and continue the SIPs in HDFC Top 200/IDFC premier equity/DSPBR Top 100 and Nifty BeES. Please advise what I should do to achieve my goal. My risk appetite is above average.

Ram

We have to make certain assumptions about your investments. For one, we assume that the Rs 22.4 lakh is today’s value of investments.

Two, we assume that you have Rs 10,000 of SIPs in each of the three funds you have mentioned, going by the value of your investments. Three, two of the schemes mentioned by you are unit-linked insurance plans and not mutual funds. We will be unable to provide recommendations on those. We assume the foreign stocks you hold can deliver about 6 per cent per annum.

If you need Rs 65 lakh for each child in today’s value, assuming cost of education will rise by 6 per cent every year, you will need Rs 1.3 crore and Rs 1.75 crore in 12 and 17 years, respectively. For each of these investments, we suggest you withdraw from equity funds, at least two years before the goal and invest in safe fixed income avenues.

PORTFOLIO

You have too many funds in your portfolio. You don’t need this many even if the value of your goal is high. Also, given your above-average risk appetite, you need not hold 20 per cent in passive funds such as Nifty BeES and Goldman Sachs CNX 500.

Unlike the US market, in India, actively managed funds outperform indices by a good margin. Reduce this exposure to 10 per cent and instead hike investments in IDFC Premier Equity by 3 per cent and move the rest to diversified funds mentioned below.

Your holdings can be as follows: A total of 10 per cent together in Nifty BeES and Goldman Sachs CNX 500 index, 12 per cent in the two ULIPs, 12 per cent in HDFC Top 200, 16 per cent in IDFC Premier Equity, 15 per cent in Reliance Equity Opportunities, 13 per cent in Quantum Long Term Equity, 10 per cent in ICICI Pru Discovery and 12 per cent (by selling all the other funds with less five per cent holding) in HDFC Children’s Gift – Investment Plan.

In all, we have upped your stake in diversified funds and mid-cap funds (IDFC Premier Equity and ICICI Pru Discovery) and reduced exposure to index funds/ETFs as well as funds that either duplicate your portfolio (like DSPBR Top 100) or are laggards.

If you can stop the SIP in the ULIP, consider investing the Rs 2000, along with the Rs 40,000 in equity mutual funds. Choose IDFC Premier Equity, HDFC Top 200, Quantum Long Term Equity and ICIC Pru Dynamic for this purpose. After ten years, i.e. by 2022, sell funds worth Rs 1.3 crore and continue the SIPs. Ensure that you hold about 25 per cent in mid-cap funds, 10 per cent in ETFs/index funds and the rest in the diversified funds/ULIPs after that.

HIGHER SURPLUS

In 2015, when you are likely to have more surplus, you can invest an additional Rs 10,000 in one or two of the diversified funds you already hold.Continue this until retirement in 2025. By 2027, withdraw the equity funds by transferring them systematically to liquid/short-term funds/fixed deposits.

To achieve your corpus your mid-cap funds should deliver 18 per cent annually, diversified funds 15 per cent and index funds and ULIPs 10 per cent, at least until 2020. Post that, we have moderated the return expectations to 12 per cent for the whole portfolio as a more mature market may not deliver high returns. Similarly, for the SIP that you will start in 2015, we have assumed 14 per cent returns.

Ensure that you periodically track the performance of funds. It is always possible that 1-2 funds fail to replicate past performance. Be ready to exit such funds. Use any extraordinary market rallies to book profits . Also, use any steep market corrections of 8-10 per cent to invest in the index funds/ETFs you hold.