Spread Your Investments

I have recently read your magazine and am very impressed with the information and analysis. I would really like some guidance. Please advise me on whether or not the allocations are appropriate. You could also suggest some changes which may be useful. I am 74 years old and have other sources of income to meet my regular expenses.
-Mitra Sen

Exisiting Portfolio
Funds		Allocation (%)
Franklin India Prima Plus-G		12.88
HDFC Equity-G		33.40
HDFC Prudence-G		10.32
HDFC Top 200-G		17.50
ICICI Pru Dynamic-G		6.64
ICICI Pru Emerging STAR-G		7.88
SBI Magnum Global-G		11.39
Total		100.00

Congratulations. You do own a wonderful basket of funds. In fact, it is rare that we come across a portfolio which has such quality fund picks.

Within two years of investment, your portfolio return stands at a remarkable 52.4 per cent (as on November 2, 2007). This should be an example to all investors as to how a good fund selection can yield high returns.

Going by your excellent fund picks and the great performance track record, your portfolio does not need any major changes. But we do have some suggestions on how you can fine tune it.

Balancing Act

We believe that every portfolio should have some sort of a balance between equity and debt to reduce the downside risk. No portfolio should be solely in either asset. However, the actual allocation between the two will depend on your age, income and appetite for risk. This is where you need to make a change. At over 90 per cent, your current portfolio is very heavily tilted towards equity.

Further, 40 per cent of your overall holdings consist of mid-cap stocks and 12.67 per cent, small caps. So your portfolio is quite risky and unbalanced.

The first thing you need to do is to re-balance your portfolio between equity and debt (refer to the cover story to understand this point in greater detail). We recommend that you exit from ICICI Prudential Emerging STAR as it is a relatively new fund. Moreover, its performance had been quite volatile due to its high small- and mid-cap orientation.

Instead, you can shift the corpus from ICICI Prudential Emerging STAR and invest it in HDFC Prudence, which is one of the top-performing balanced funds. Increasing the amount in HDFC Prudence will automatically increase your debt component and make your portfolio look healthier and will reduce the downside risk considerably.

We believe you need to increase your debt component further. So we suggest that you channelise a portion of your portfolio to Birla Sun Life MIP and ICICI Prudential MIP. MIPs are primarily debt- oriented funds with a small equity allocation (between 10-20 percent). While choosing an MIP, don't just look at the performance, but do check the asset allocation patterns. (Read Category Watch on MIPs)

Diversifying
All funds handled by one asset management company (AMC) have a common research team and a chief investment officer (CIO). But to have an element of diversification in a portfolio, it is wise not to have a huge exposure to just one fund house. An AMC may also have some great funds at a particular point in time which could fall out of favour later. So not only does it make sense to diversify amongst funds, but even amongst fund houses. Not only do you benefit from the different research philosophies and styles of investment but it also lowers the risk.

Currently, you seem to be very keen on HDFC funds. Around 60 per cent of your current portfolio is invested only in HDFC funds. And 33.4 per cent of the portfolio is in HDFC Equity. So your portfolio is very largely dependent on the schemes of HDFC Mutual Fund and on the performance of HDFC Equity.

We recommend that you sell some investments in a phased manner and explore more investment opportunities available. While shifting the corpus, make note of exit loads and the capital gains tax to be paid. Currently the tax on equity funds is 10 per cent if you exit within one year of investment and it is nil if you sell after one year of investment. In your case though, as all of your HDFC funds have exceeded one year of investment, you would not be liable to pay any capital gains tax or exit loads. We suggest that you shift some amount to Reliance Vision and Birla Sunlife Frontline Equity to give your portfolio a more diversified tilt.

Timing the Market
Going by the fact that you are not a regular investor, luck has certainly been on your side. A huge chunk of your investment, 46 per cent to be precise, has been invested within a period of 33 days. This strategy could have backfired badly had the markets tanked post your investment.

Fortunately for you, the markets have been on a roll since then. The Sensex has zoomed by over 41 per cent from the date of your investment (as on November 2, 2007). But in future, please avoid taking such risks and spread your investments over months by adopting a systematic approach.

Take a systematic investment plan (SIP) whereby you invest fixed amounts every single month. So whichever direction the market takes, you will be consistently investing.

End of the day, there is no substitute to being a disciplined and consistent investor.

Suggested Portfolio Funds % Allocation Birla Sun Life Frontline Equity-G 11.00 Birla Sun Life MIP 7.50 Franklin India Prima Plus-G 12.88 HDFC Equity-G 18.00 HDFC Prudence-G 15.10 ICICI Pru Dynamic-G 6.64 ICICI Pru MIP-G 7.50 Reliance Vision-G 10.00 SBI Magnum Global-G 11.39 Total 100.00

(by valueresearch)

Best Tax Saving Funds

Q. I want to invest for both good returns & insurance cover. Suggest the best options.
Pavan
A. For life insurance, take a term plan from any insurer. For good returns, invest systematically in some well performing equity diversified funds like Franklin India Prima Plus, HDFC Equity or Reliance Vision.

Q. Which would be the best funds for saving taxes under section 80C?
A. For saving taxes choose from well rated ELSS funds. You can choose from HDFC Tax saver, Magnum Tax gain, Birla Sun Life Tax Relief '96, Sundaram BNP Paribas Taxsaver.

Q. Can I invest my money in PMS schemes?
Vandana Hake
A. PMS services are ideal for HNI (High Networth Individuals) who do not have time to manage their money. However PMS services are not properly regulated in India. The system is also not very transparent. One should carefully investigate the terms and conditions before opting for such services.

Q. I am an insurance agent. I usually tell people that I will double your money within 4 years. Is it true?
A. No. There is no guaranteed and quick way of doubling money. Investors should be disciplined and invest systematically.

Q. Please give information about future performance of LIC PROFIT PLUS Growth.
A. LIC Profit Plus is a ULIP. Avoid investing in ULIPs as they have high charges which hamper the return on investment.

Q. Suggest better option - to purchase fund immediately before or after dividend payout.
O P Srivastava
A. Mutual funds dividends are nothing but liquidation of your own holdings. When dividend is declared, NAV falls by the same amount. Investing just before a dividend is declared, you will get back a portion of your invested amount. For growth of corpus, choose dividend reinvestment.

Q. I regularly watch FUND KA FUNDA. Please explain Large Cap, Mid Cap, Small Cap.
M.A. HUSSAIN
A. Companies are classified as large, mid and small cap based on the market capitalization that changes everyday. As per November 30, 2007 there were 72 large cap companies (market cap of over Rs. 15000 Crore). There were 212 Mid Cap Companies ( Market Cap less than Rs. 15000 Crore) and 2702 small cap companies ( market cap less than Rs. 2500 Crore).

Q. How is SBI Arbitrage Opportunities Fund?
A. SBI Arbitrage Opportunities was launched last year and has performed well in its category since then. It would be a good choice in the arbitrage category.

Q. Which are the best equity diversified mutual funds to invest?
A. You can choose from top rated equity funds like Reliance Vision Franklin Prima Plus, Birla Sun Life Equity, HDFC Equity.


(by valueresearch)

Does the Fund Size Matter ?

Size of a fund definitely has a role to play, but not when it comes to deciding which one to buy or sell. If we look at size in the context of equity funds, smaller funds have the capability of being more agile. This is especially true for mid- and small-cap funds. These funds can exit and enter stocks of a smaller market cap without affecting the price of the stock too much. But, if we look at the performance of large mid-cap offerings such as Reliance Growth and Sundaram BNP Paribas Select Midcap, this theory is disproved.

In the case of index funds, size may be an asset. Any inflow can be easily invested without giving rise to significant tracking error. In the case of a small index fund, the same inflow may look substantial and it may not be easy to allocate it without causing a tracking error.

Where debt funds are concerned, size is critical because it has a direct impact on the expense ratio. Larger funds can distribute fixed expenses over a number of investors and bring down the expense ratio. They can also negotiate better rates with issuers of debt paper.

On a closing note, there will be exceptions to all the above observations. Though theoretically there are specific kinds of funds which are better off either as large or small funds, there is no clear-cut trend to prove that a larger fund will perform better than a smaller fund or vice versa.

(by valueresearch)

Magnum Multiplier Plus - Risky Proposition

Like wine, it has matured with age. Magnum Multiplier Plus has had superb as well as dismal performances in the past. However, the fund has matured & will interest investors who can take a few risks

Magnum Multiplier Plus was amongst the most criticised in the 2000-2001 meltdown. After delivering an astounding 218.91 per cent in 1999, the fund lost (-) 50.31 per cent in 2000 and followed it up with another disastrous (-) 41.58 per cent loss in 2001. The culprit for this abysmal performance was lack of ample diversification and highly concentrated bets taken in the IT space. But the fund managed to pull out of this trench.

A look at the most recent bearish quarters' ending June 2006 (April-June) and March 2007 (January-March) shows that the fund has learnt to manage the downside better than before, and has lost only as much as the category average. This has been done by reverting to the time tested strategy of diversifying holdings. As a result, the fund has managed to progressively deliver a much better risk- adjusted return compared to the average peer. With assets evenly divided between large and mid caps and a small exposure to small caps, the fund steers clear of a capitalisation bias.

But old habits die hard. It had a rather high 26 per cent allocation to the basic-engineering and another 9.67 per cent in the construction space (as on July 31). Now construction is 17.36 per cent and basic-engineering 16.34 per cent (September 30). Its IT sector exposure went down to 2.05 per cent (July 31) to rise to 8.05 per cent (September 30). The fund will sit well with investors who are willing to take on slightly higher risk than the category average.

(by valueresearch)

Birla Sun Life Tops The Charts

The Value Research Fund Rating for the month of December saw as many as six funds gain entry into the Value Research Five Star Funds family. These esteemed funds were Birla Income Plus, Principal Child Benefit, Principal MIP, ICICI Prudential Income Multiplier Reg, Grindlays GSF PF Inst and ING Domestic Opportunities.

ING Domestic Opportunities finally earned the five star tag after a three month wait. This is the fund's first ever five-star holding.

It was also a first time entry into the five star family for Principal MIP Plan, after a rating life of four years. Another significant improvement has been made by Birla Floating Rate LT. After fluctuating between the two and three star ratings, Birla Floating Rate LT has moved up two steps to become a 4 star fund thanks to its improved returns and reduced risk.

Things were however not so good for ICICI Prudential Dynamic. After enjoying the four star rating for six successive months, the fund fell back to the two star category in the month of November, but now it is trying to regain its position and scored a three star rating for the month of December.

HSBC Equity has made a smart recovery as far as the ratings are concerned. After languishing in the three star fund family for eleven months, the fund has again gained entry into the four star category. This fund started its rating life with a four star tag but at the beginning of this year it had slipped down to 3 stars.

This month, while six funds earned the five star rating, the same number of funds lost their 5-star tag. Taurus Libra Bond slipped to become a 1-star fund after enjoying the 3-star tag for the past twelve months.

As far as the fund families are concerned, the top position is jointly shared by Birla Sun Life AMC and ICICI Prudential AMC with six of its funds finding a place in the top-rated category. Closely following it is SBI Mutual; lagging behind by just one step with five 5-star rated funds.

However, when we combine the number of four and five star funds: Birla Sun Life AMC tops the chart with 16 four star rated funds and 6 five star rated funds. ICICI Prudential AMC comes at the second position with ten 4-star rated funds and six 5-star rated funds.

On the whole, of the total 463 rated funds, 35 funds have been upgraded and almost as many 36 funds, downgraded. 392 funds have maintained a status quo.

Fund Families: How they Stack Up AMC Name « «« ««« «««« ««««« ABN AMRO 2 - 2 1 - Benchmark 2 - 2 - - Birla Sunlife 3 5 9 16 6 BoB 4 3 2 - - Canara Robeco 2 3 4 4 - DBS Chola 2 1 4 1 1 Deutsche 1 3 3 1 1 DSP ML 2 4 4 4 1 Escorts 1 4 3 - - Fidelity - - - 1 - Franklin Templeton - 6 22 6 2 HDFC 3 6 8 8 4 HSBC 1 1 5 6 - ICICI Prudential - 4 18 10 6 ING 1 5 5 3 1 J M 1 8 3 1 - Kotak Mahindra 1 2 10 4 2 LIC 4 4 6 3 1 Principal 1 6 4 5 4 Quantum - - 1 - - Reliance 1 2 6 5 3 Sahara - 1 3 2 - SBI 4 6 10 2 5 Standard Chartered 2 4 5 3 1 Sundaram BNP Paribas 2 7 4 3 1 Tata 1 3 10 11 4 Taurus 4 1 1 - - UTI Mutual Fund 2 13 8 5 4 As on December 31, 2007

(by valueresearch)