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Tips for a portfolio makeover
October 23, 2007
As some investments outperform the rest, the weightage or allocation to various investments change. The process of correcting this skewness is called rebalancing.
Let's talk about Reliance [Get Quote] Diversified Power which is a part of your portfolio. Since the fund has done exceedingly well, it now enjoys a 12.56 per cent allocation. Now, let's say that you set a 5 per cent limit on the fund, and every time it breaches this limit by a decent amount, you book profits and transfer this money to a debt fund. Through this debt fund you can systematically channelise money to various other equity funds.
In other words, rebalancing is what you do when a particular investment's allocation has become large and you offload some of it. The biggest benefit of this technique is that it offers an automated method of booking timely profits.
Asking you to reduce the exposure to the best performing fund in your portfolio may come across as absurd, but re-balancing is imperative to restore balance and reduce the volatility of your portfolio. This is especially true for funds such as Reliance Diversified Power which have a very narrow focus. A single development going against the specified sector can adversely affect your entire portfolio. Your portfolio is replete with such instances. Between four large-cap oriented funds � Principal Large Cap, Reliance Equity, Magnum Global and Reliance Vision � you have invested close to 28 per cent of your money. We haven't yet included your tax planning funds, some of which have a similar focus.
We delineated your holdings into core, risky and illiquid. Prescribing a limit on each will ensure that you book profits in some funds and limit the illiquid portions.
One option is to wait for the markets to correct to 13,000 levels to start redeploying your money. But we do not recommend timing the market. The second is to put your money in a debt fund and consistently reinvest it in the equity market by way of a Systematic Transfer Plan (STP) over the next one year. Should the market climb, you will obviously benefit as you are investing in a rising market. If it corrects, you will be investing at lower levels. It's a win-win situation.
We selected a debt fund for each of the four core equity holdings. An STP is only possible between two funds of the same fund house. As a result, your choice is limited and often you will need to assess a variety of different categories of debt funds to pick a suitable offering. Now that we have removed the clutter from your portfolio you will be able to track your investments better. With four core funds in your kitty, you can actually watch their performance on a regular basis. Keep comparing the year-to-date performance vis-�-vis the category to gauge any possible slowdown.
While being over invested in any one particular fund is risky, you must be wary of high exposure to any one fund house. For instance, you have committed 34.21 per cent of your money with Reliance Mutual Fund.
While this is not too severe, going forward you need to be careful about this aspect as well. This is one of the reasons why we did not retain Magnum Contra as a core. Doing so would have translated to a 40 per cent exposure to the fund house.
The second aspect that you need to be careful about is your holdings in Part II of your portfolio. You need to keep yourself updated here and follow any possibility of a slowdown in these funds or the sectors they invest in.