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Portfolio design is about matching an investor’s profile and needs

You should carefully design your financial portfolio and choose the path that you are comfortable with

Please help me broaden my investment portfolio. I am new to mutual funds. I started two tax-saving SIPs (Reliance Tax Saver (ELSS) fund; and Axis Long term Equity—both direct growth) of Rs2,000 each from April 2015. I want to start investing towards wealth creation over the next 3-5 years, with further SIPs of Rs6,000 a month.I have done a bit of research about Kotak Select Focus fund and Mirae Asset Emerging Blue-chip fund—both with direct growth option. Is that a good choice?

—Yogesh Padwal

You are presently investing Rs4,000 in an all-equity portfolio consisting of two tax-saving funds. You are seeking to expand it to a Rs10,000 per month SIP portfolio that would also be an all-equity portfolio by adding two equity funds. This would make for an aggressive SIP portfolio. The funds that you are seeking to add are both good funds, but one of them is a diversified fund (the Kotak fund), and the other is a mid- and small-cap fund that invests in the most high-growth, high-risk part of the market. If you are investing for the real long-term (greater than 7-10 years) and you are okay with taking on so much risk, you can stay with this portfolio. Else, here are a few alternative paths you can consider. One would be to replace the diversified fund with a large-cap fund (Kotak 50 would be a good choice here) and the other would be to replace the mid-cap fund with a balanced fund (Birla Sun Life ’95 would be a good option). Either or both these moves would lower the risk profile of your portfolio from where it is now. A third option would be to further reduce the risk of your portfolio by replacing one of your equity funds with a debt fund. For example, you can replace the large-cap fund with a short-term debt fund such as HDFC Regular Savings fund. At the end of the day, portfolio design is about matching an investor’s profile and needs with specific investment options, and you can choose the path that you are comfortable with.

I am new to investing. I would like to invest Rs10,000 per month via SIPs. Kindly recommend some funds.

—Ramnath Arunachalam

When an investor is considering getting started with mutual fund investing, especially for long-term wealth building purposes, there are three starter type investment options that they should evaluate and choose from. Depending on their situation and risk levels, which one of these three to choose from would vary. The first would be the tax-saving equity-linked savings scheme (ELSS) funds, which would enable you to get an immediate tax deduction of up to Rs1.5 lakh under section 80 (C) of the income-tax Act. There are several options under this section, and one should evaluate for oneself as to how much monthly contribution should be allocated to such mutual funds. The second type of funds would be what are known as balanced funds (equity-oriented hybrid funds), which invest both in the equity market as well as the bond market. These funds give a good exposure to markets for a beginning investor at a lower risk, than a pure-equity fund. The third type of fund would be a pure large-cap fund. Such funds invest in relatively stable, large companies in the market and are considered the least risky of the equity-fund categories. So, a beginning investor such as yourself can invest as much of the monthly investment as required in tax-saving funds (a fund like ICICI Prudential Long Term Equity fund), and split the remaining amount between a balanced fund (such as HDFC Balanced fund) and a large-cap fund (such as Birla Sun Life Frontline Equity fund).

My adviser told me to redeem my mutual fund units from Franklin India Blue-chip fund. He says there is over exposure to equity in my portfolio. However, I am against this strategy as this is a large-cap fund and I am a long-term investor. Please guide how to proceed.

—Nitin Patel

It is hard to pass judgement on the advice you have received, without knowing the full details of your portfolio and the complete advice that you were provided by your adviser. Also, your adviser may have a sense of your risk tolerance level that I am not privy to. In general, advisers approach long-term portfolio building with some caution and take all factors—such as your age, time frame, and risk profile—into account. It would also be important to consider what your adviser’s suggestion was with respect to where to reinvest the money that he is seeking to redeem from this fund.

Having said all this, I must state that the advise to redeem Franklin India Blue-chip comes as a bit of a surprise. This is a good, steady flag-ship large-cap fund from Franklin India and it has an excellent track record of stable performance. I would urge you to have a conversation with your adviser and let him know that you are okay with the risk level of the portfolio considering your long-term time frame.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

Queries and views at mintmoney@livemint.com

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