Thursday, January 22, 2009

Is Portfolio Balancing Necessary?

One reader of my blog Mr.Nester Dias wrote a brilliant letter and here it goes :
Hi ShareSher
I am 32 years old, newly married and would like to invest upto 40K per month on mutual funds ( SIP based ) . That is around 45% of my income post tax - I consider myself a safe investor and would like to make steady returns and not lose money . Basically I am a new entrant to Mutual Funds ( entering in phases since Feb 08 ) but am thinking that this present moment would be the rite time to a) learn more about mutual funds/stocks b) very importantly make money :) . I am looking at making money in the long run ( say 5 years + from now ) .
Been doing a lot of reading and have noticed that most of the fund do have the same stocks - this applies to contra funds also..So I am not very sure about how the financial experts evaluate funds . Anyway having said this can you lend me your expert opinion on my portfolio
Would appreciate your input and your reasoning why . Thanks
Reliance Diversified Power Sector - Dividend Plan 25000 One time
Principal PNB Long Term Equity Fund - Series 2 10000 One time
JM Contra Fund - Dividend Plan 10000 One time
DSP Merilly Lynch TIGER Fund - Dividend Regular 25000 One time
Kotak Global Emerging Market Fund 10000 One time
Birla Sun Life International Equity Fund- Plan B - Dividend 30000 One time
Tata Indo Global Infrastructure Fund - Dividend 30000 One time
Tata Pure Equity Fund - Dividend 2500 SIP for 1.5 years
Tata Equity Oppurtinity Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Top 100 Equity Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Tax Saver Fund - Dividend 2500 SIP for 1.5 years
Kotak Tax Saver - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Top 100 Equity Fund - Dividend 25000 One time
DSP Merill Lynch Top 100 Equity Fund - Dividend 2000 SIP for 1.5 years
HDFC Top 200 Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch TIGER Fund - Dividend 25000 One time
DSP Merill Lynch TIGER Fund 2500 SIP for 1.5 years
Sundaram BNP Opportunities CAPEX Opp Fund - Dividend 2500 SIP for 1.5 years
Kotak 30 - Dividend 25000 One time
Kotak 30 2500 SIP for 1.5 years
ICICI Prudential Infrastructure Fund (Dividend ) 30000 One time
ICICI Prudential Infrastructure Fund 2500 SIP for 1.5 years
Century SIP - BIRLA SUNLLIFE Frontline Equity Fund ( Growth ) 2500 SIP for 1.5 years
Reliance - Regular Saving Fund (Growth ) 2500 SIP for 1.5 years
Regards

SRIKANTH SHANKAR MATRUBAI replied :

Dear Nester Dias,
You have a good exposure of your savings to Equities. But considering, that you call yourself a 'Safe" investor, it surprises me that you have more than 40% of your lumpsum investment into Infrastructure Funds and 25% of your sip investments going into again Infrastructure Funds. You need to reduce your exposure to Infrastructure Funds and add more of Diversified Equity Funds to add Stability to your portfolio. While Infrastructure as a Sector looks highly promising, its short and medium term outlook does not look all that rosy because of the slowdown in the economy and the high interest rate scenario. If you are willing to hold for more than 5 years or so, you can continue to stay invested in these funds.

I agree with you that most of the funds do have same set of stocks. But the key differenciator as to why some funds become outperformers and some laggards, is because of the percentage of the stocks they own. Suppose Fund A owns more Reliance and Fund B owns more L&T. And, if say, Reliance spikes up due to some news, then Fund A gains more thant Fund B and thus becomes a better performing fund.
Also, it also depends on Cash component held by fund at each stage of market. Fund A holding more cash in a Bearish Market will definitely gain and will be able to outperform others due to its ability to keep picking stocks at every fall.
Also, some funds perform better because of their Enter/Exit Strategy. Example, ICICI Fusion Fund II has bought Subhiksha (unlisted) at a very low low price, and once the scrip is listed, the Fund will see a Spike in its NAV.
These and some more factors are considered while evaluating funds and their future performance.
As far as your portfolio is considered, while you can continue to stay invested in most of your lumpsum investments for now, do take a call around April 2009 when the Full year's Annual Results are announced.
However, since you already have sufficient exposure in Infrastructure Fund, I recommend you stop/switch your sip in all the three Infrastructure funds, and consider investing in Diversified Equity Funds.
So, stop sips in DSP Tiger, ICICI Infra and Sundaram Capex Funds.
Alternatively, you can consider investing in HDFC Prudence Fund, Sundaram Select Focus Fund and DWS Alpha Equity Fund.
Best of luck,
Srikanth Shankar Matrubai.


Also visit http://equityadvise.blogspot.com for an indepth Equity Analysis

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