IDEAL MF portfolio

POSTED BY Rajendran ON December 1, 2010 1:23 am COMMENTS (3)

Can you please drop your views on how an idea MF portfolio should look like for a person who can take high risk?

I mean how many LARGE CAP, MID CAP, SMALL CAP, INDEX FUND, SECTOR FUND etc need to be there…  Debt Fund, ETF etc.

Also percentage one needs to have in Equity and in DEBT? Thanks.




3 replies on this article “IDEAL MF portfolio”

  1. Atul says:

    I came across nice article on capitalmarket regarding MF investment. Copy/pasting here since I could not get the exact link. Since its open to public view I dont see any harm sharing here.

    Investment Strategy: A wake-up call

    Even a portfolio of mutual fund schemes needs to be revised periodically to maximise returns

    Mutual fund is an ideal option for retail investors who need some exposure to the equity markets but either do not have the time to manage their own portfolio of stocks or do not understand much about investing in equity markets. Choosing a mutual fund is not sufficient to get the maximum benefit from investment. Reviewing the funds in the portfolio and taking remedial action is equally important.

    Equity mutual fund investors should look out for signs that suggest a churn in their portfolio. If a fund underperforms the benchmark consistently by a wide margin, investors should look at exiting the fund. Minor underperformance may be ignored if the fund has a reputation of beating the benchmark regularly.

    Also, if the investment objective of the fund is not matching with the financial objective of the investor, it is time for a churn. For instance, if an investor has a low-risk appetite and his fund is overweight on mid-cap stocks, he can exit the fund and park his money in a fund that suits his risk profile. Burgeoning assets under management (AUM) of a fund along with drop in performance may also be a negative sign. AUM of better performing funds tend to rise at a brisk pace as many investors chase such funds. In such a scenario, the fund manager gets lot of money to manage. If there are not enough opportunities in the market to deploy the assets, the performance of the fund may drop considerably. This can be a major risk in small- and mid-cap funds as the volume traded in small- and mid-cap stocks is quiet low. This is a serious limitation for a fund manager as he has to keep his exposure in a stock as per the volumes so that easy exit option is available. Also, large-scale entry or exit can destabilise a stock’s price, specially if the counter is not very liquid. Thus, the fund manager’s universe narrows down to liquid medium-cap stocks with a potential to grow into large caps. Thus, if a fund is unable to perform with a rise in AUM, then investors can opt to get out of the fund. This was seen in DSP India Tiger Fund, SBI Magnum Contra Fund and SBI Magnum Taxgain 93.

    Fund managers play a crucial role in managing a fund. Exit of a seasoned fund manager from a fund house may affect the fund adversely. The fund house may not find a suitable replacement and this may lead to a drop in performance level. Such a phenomenon was seen in various funds managed by Sandeep Sabarwal, a fund manager with SBI. Funds like SBI Contra Fund, and SBI Magnum Tax Gain Fund 93 did very well during his tenure as fund manager between 1995 and 2005. As soon as he left the fund house in 2005, the performance of these funds took a hit. Also, Pricipal Emerging Bluechip Fund lost its top spot among the midcap category of funds in 2009 after the exit of fund manager Pankaj Tibrewal
    in January 2010.

    It not always possible to catch hold of the best-performing fund. In fact, no fund can remain a best-performing fund for a long period of time. For instance, SBI Magnum Tax gain 93, Birla Tax Relief 96, and PNB Personal Tax Saver were among the best-performing funds in the equity-linked savings scheme (ELSS) category in 2005-2006. But since the downturn seen in the markets in 2008, these funds have struggled to get back to the top. In the diversified equity funds category, Sundaram Select Focus Kotak 30 and DWS Alpha Equity Fund were out of the rankings after witnessing the downturn. Thus, rather than focusing on rankings investors should opt for consistency and compare the performance with their respective benchmarks. If the fund is consistently beating the benchmark, then there is absolutely no need to get out of the fund. But such benchmarking may not reflect the true performance of a fund.

    Apart from comparison with the benchmark, match the performance of the scheme with the average returns of all the funds in the same category. This comparison is particularly useful for thematic and sector-oriented funds, where a comparable index or a benchmark is not available. Infrastructure funds are the perfect example where there is no comparable index. These funds are often benchmarked to the broader indices like S&P Nifty and BSE 100.

    Though reviewing and churning of portfolio is an important process, it should be done only when required. Mutual funds and stocks behave differently. Stocks may give sharp moves on either side in a short time span as they are affected by news flows related to the company or the sectors in which they operate. A mutual fund, being a portfolio of stocks, may not show such sharp moves. Stocks may require a review even on a daily basis but a mutual fund portfolio may not require such frequent reviews. Also, as mutual funds are considered instruments for long-term investment, their performance should be compared over a longer time period.

    Sectoral and thematic funds demand higher monitoring than diversified equity funds as fundamentals of sectors can change quickly due to various reasons like change in government policy, natural calamity or any major event. In 2008 and 2009, the pharmaceutical and FMCG sectors performed well as investors perceived these two to be defensive sectors. But as soon as the economy started to look up, other sectors such as banking, capital goods and IT outperformed.

    Among diversified equity funds, small- and mid-cap funds should be reviewed and watched more closely than large-cap diversified equity funds. Small- and mid-cap funds have a higher beta and are the first to fall in unfavorable market condition. A beta of one means the fund moves in tandem with the market, but a beta of more than one means it is more volatile than the market and may outperform the market when the markets is in an upswing and may underperform when the market is falling. A beta of less than one implies the fund’s movements are smaller than that of the benchmark and may give returns below the market. Index funds and exchange traded (ETFs) i.e., funds traded on the stock excahge, too, need to be reviewed to keep a check that the tracking error is not very high and the fund management charges have not escalated above average.

    Investors should also consider the tax implications of churning, which can invite short-term and long-term capital gain tax on sale of equity-oriented mutual funds. The rate of tax on long-term and short-term capital gain from stocks and equity mutual funds is the same. While the short-term capital gain tax applicable is 15%, there is no tax on long-term capital gain. But after the implementation of the Direct Taxes Code from the April 2012, the long-term capital gain tax on funds held for more than a year from the close of the financial year in which a scheme is bought will be nil if the securities transaction tax (STT) has been applied. For a scheme held for less than a year, the short-term capital gain will attract the personal marginal tax rate with 50% deduction.

    The applicability of STT on stocks and units of mutual funds differ only if the units of equity mutual are not traded on the stock exchange. If the units are transacted on the stock exchange, they will attract STT of 0.125% on buy and sell transactions. If the transaction is off market, then the STT of 0.25% has to be paid only at redemption.

    Mutual funds have become very cost-effective since the scrapping of entry load. Though exit loads still exist, it is small in percentage terms for open-ended equity funds. The exit load may vary from 0 to 1% of the redemption value and may also depends on the holding period. Lower the holding period, higher is the exit load and vice versa. Most funds have removed exit load if units are held for more than one year.

    Though a mutual fund portfolio requires less amount of churning than a portfolio of stocks, investors should not ignore it. Having the right mix of funds at the right time will pep up the overall performance of the portfolio. At the same time, over-churning may lead to higher transaction cost and lower returns.
    Volatility impact
    Small- and mid-cap funds have a higher beta and are first to fall in bear market
    Top 5 high beta schemes
    Religare AGILE Fund (G) 1.1548
    Religare AGILE Tax Fund (G) 1.0791
    JM Core 11 Fund – Series I (G) 1.0485
    ICICI Pru Banking & Financial Services (G) 1.0259
    IDFC Equity Fund – A (G) 1.0181
    Top 5 low beta schemes
    Edelweiss Absolute Return Equity Fund (G) 0.1622
    Tata Growing Economies Infras-Plan A (G) 0.169
    Reliance Small Cap Fund (G) 0.2304
    Franklin Pharma Fund – (G) 0.3635
    UTI-Pharma & Healthcare Fund (G) 0.3765

    Keeping track
    AUM of better performing funds tend to rise at a brisk pace
    Top 5 schemes by AUM
    HDFC Top 200 Fund (G) 9357.9063
    HDFC Equity Fund – (G) 8206.3908
    SBI Magnum Tax Gain Scheme (G) 6089.9886
    SBI Magnum SFU – Contra Fund (G) 3645.6497
    ICICI Pru Infrastructure Fund – (G) 3604.8532
    Five schemes with the lowest AUM
    Sahara Star Value Fund (G) 2.0805
    Sahara Super 20 Fund (G) 1.6654
    Taurus Nifty Index Fund (G) 1.3559
    Escorts Leading Sectors Fund (G) 1.0206
    Edelweiss ELSS Fund (G) 0.8
    As on end October 2010

  2. prabeesh says:

    Oops 5% i missed it should goto mid&small cap to make it 30%

  3. prabeesh says:

    I don’t think there can be a IDEAL MF portfolio for any kind of risk takers..

    If there is one for high risk takers i will go like this
    1 Large Cap 30%
    1 Large&Midcap 30%
    1 Mid & Small cap 25%
    1 Debt 10%

    Just my Way

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