npavan78
26-06-2008, 10:56 AM
By investing in funds and stocks, I have invested a decent amount of corpus over time. But, now I feel that my portfolio consists of too many stocks and funds. Kindly suggest, how I can fine tune my portfolio. Also guide me if I should exit or add some more
- Mr. Bansal
There is often a very fine line between a well diversified portfolio and an over diversified one. And in most cases, the investor is unable to differentiate between the two. The same can be said for Mr. Bansal. With 13 equity diversified funds and 61 stocks in a high value portfolio, Mr. Bansal might be under the impression that his is a well diversified portfolio. Unfortunately, it is not! His portfolio is invested in 242 stocks (inclusive of the investments made by mutual funds), with 92 per cent of these stocks having a portfolio allocation of less than one per cent. This makes his portfolio an over diversified one.
The good news is that the portfolio is high on quality. With 70 per cent exposure to large cap stocks through quality equity funds and direct investments in good companies, your portfolio is right on track quality-wise. However, you need to check on the over allocation to a single company. Reliance Industries alone accounts for 18 per cent of the portfolio. Your portfolio is largely dependent on a single sector as well. Nearly 30 per cent of the portfolio is invested in the energy sector. High exposure to a single company and/or sector should be avoided because it makes the portfolios largely dependent on it and increases risk.
The one thing missing from the portfolio is a debt component. Debt provides stability and helps you rebalance the portfolio when required. To further optimize your portfolio we have devised three plan of actions. Evaluate each plan carefully and choose the option that suits you best.
Plan 1: Direct Equity Investments
Generally, an investor should invest directly in equities only if he has the expertise of managing and researching the various companies himself. One must be confident about investing directly, as it requires a high risk appetite and a heart which can handle market gyrations. If you are comfortable with this, go ahead and build a complete equity portfolio. Considering the fact that most of your investments are invested directly in equities, you can redeem your remaining investments from mutual funds and shift them to high quality stocks.
In your case, consolidation is the key. For investment in equity, a portfolio of around 20-25 stocks would suffice. Your equity portfolio already consists of investment worthy companies which you can consider and shortlist for investment. For the same, you should gradually liquidate your investment in mutual funds and stocks. Do ensure that if you exit funds or stocks before one year of holding, you would be liable to pay short-term capital gains tax of 15 per cent on gains. So do take note of the date of investing before exiting and reinvesting your current holdings.
Plan 2: Actively Managed Equity Funds
Consider this plan if you are willing to keep things simple and do not want to get into the hassles of monitoring your investments on a regular basis. Opt for mutual funds. By solely investing in quality funds, you would also ensure that you achieve proper diversification as required and also benefit from the professional management that they offer.
- Mr. Bansal
There is often a very fine line between a well diversified portfolio and an over diversified one. And in most cases, the investor is unable to differentiate between the two. The same can be said for Mr. Bansal. With 13 equity diversified funds and 61 stocks in a high value portfolio, Mr. Bansal might be under the impression that his is a well diversified portfolio. Unfortunately, it is not! His portfolio is invested in 242 stocks (inclusive of the investments made by mutual funds), with 92 per cent of these stocks having a portfolio allocation of less than one per cent. This makes his portfolio an over diversified one.
The good news is that the portfolio is high on quality. With 70 per cent exposure to large cap stocks through quality equity funds and direct investments in good companies, your portfolio is right on track quality-wise. However, you need to check on the over allocation to a single company. Reliance Industries alone accounts for 18 per cent of the portfolio. Your portfolio is largely dependent on a single sector as well. Nearly 30 per cent of the portfolio is invested in the energy sector. High exposure to a single company and/or sector should be avoided because it makes the portfolios largely dependent on it and increases risk.
The one thing missing from the portfolio is a debt component. Debt provides stability and helps you rebalance the portfolio when required. To further optimize your portfolio we have devised three plan of actions. Evaluate each plan carefully and choose the option that suits you best.
Plan 1: Direct Equity Investments
Generally, an investor should invest directly in equities only if he has the expertise of managing and researching the various companies himself. One must be confident about investing directly, as it requires a high risk appetite and a heart which can handle market gyrations. If you are comfortable with this, go ahead and build a complete equity portfolio. Considering the fact that most of your investments are invested directly in equities, you can redeem your remaining investments from mutual funds and shift them to high quality stocks.
In your case, consolidation is the key. For investment in equity, a portfolio of around 20-25 stocks would suffice. Your equity portfolio already consists of investment worthy companies which you can consider and shortlist for investment. For the same, you should gradually liquidate your investment in mutual funds and stocks. Do ensure that if you exit funds or stocks before one year of holding, you would be liable to pay short-term capital gains tax of 15 per cent on gains. So do take note of the date of investing before exiting and reinvesting your current holdings.
Plan 2: Actively Managed Equity Funds
Consider this plan if you are willing to keep things simple and do not want to get into the hassles of monitoring your investments on a regular basis. Opt for mutual funds. By solely investing in quality funds, you would also ensure that you achieve proper diversification as required and also benefit from the professional management that they offer.