I was working as senior scientific officer in a central government organisation. Before my retirement, around midway through 2006, I began to invest in mutual funds. Now I feel I have gathered more funds than I initially desired. And, I find that many of the schemes have similar objectives. I get a sufficient amount as a pension and do not depend upon the earnings from these funds for my livelihood. I have 5 to 10 year investment outlook in mind. Could you review my portfolio? I need advice on trimming my portfolio and also some guidance as to when I should redeem the schemes. Is it possible to change over to the growth scheme from the dividend one within the same fund without paying any entry and exit loads?
- S.P.Hatapaki
You have accurately zeroed in on your portfolio's weakness - too many funds doing the same thing. In about a year's time you have managed to accumulate 19 funds! The good thing is that despite going on a fund shopping spree, you have steered clear of close-ended funds. This, in turn, has given us greater leeway in trimming and rationalising your holdings.
How the Cookie Crumbles
We have clubbed similar schemes and then selected one or two funds from each such category. There is the large-cap growth oriented category (10 funds), mid- and small-cap category (5 funds) and the tax planning or ELSS category (2 funds).
Another four funds can be best described as opportunity funds that have no real sector or market-capitalisation bias. It is this category of funds in your portfolio that lends uncertainty to your portfolio's focus.
A look at the suggested portfolio will show that your core holdings have been reduced to five funds. Among these core holdings, in the large cap space we have retained only HDFC Equity and Reliance Vision. Similarly, of the five mid- and small-cap focused schemes, we have retained only two. By doing this we have consolidated nine funds to just four. You would have noticed that we did not exclude ICICI Prudential Infrastructure. Although we would not classify ICICI Prudential Infrastructure as a core holding, we have retained the scheme due to its diversified portfolio which complements your other holdings.
Due to the three year lock in, we could not tinker with your tax planning funds and have retained HDFC Taxsaver and Magnum Taxgain in the same proportion. Before making any future investments in these ELSS funds, we would strongly recommend a look at the performance of these funds. While there are no doubts on Magnum Taxgain and it retains its position of being one of the best performing funds, of late, HDFC Taxsaver has been showing some signs of slowing down.
Amongst your opportunity fund holdings, we have retained only one fund. This has reduced your total exposure to opportunity based funds from 23 per cent to 15 per cent. The reason for retaining Franklin India Prima Plus has been to add slight aggression to your portfolio. Moreover, while this fund chases opportunities and is unbiased towards sectors, it retains a predominantly large-cap focus. Another advantage offered by the fund is that, through its holdings your portfolio will have adequate representation of the current bullish theme.
In the revised portfolio, you will notice that your mid-cap holdings have increased. Do not get alarmed by this since most fund managers are currently bullish on these stocks. In fact both HDFC Equity and Magnum Contra have upped their exposure here. HDFC Equity is known to alter its allocation between companies of different market capitalisation, as and when it senses a rally here.
Redemption Process
Considering that your investments are just about a year old, the portfolio suggested by us will take some time to achieve. This is because we want to eliminate the liability of paying a short-term capital gains tax. When you transfer funds from one scheme to another it amounts to redemption. And profits made on redemption of holdings that are held for less than one year are liable to a tax of 10 per cent.
In addition, there are costs in the form of entry loads to be considered. So as a first step you can look at reallocating funds that have been held for more than a year. After running this criterion, you can look at redeeming the 2- and 3-star funds.
As to your query regarding switching between the growth and dividend option of a particular scheme, fund houses do not charge their investors for such a switch. Given that you do not depend on your mutual fund investments for income and intend maintaining your holdings over a long term period, the growth option would definitely be more suitable.
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