Mutual Fund Portfolio Trimming & Systematic Transfer Plan

POSTED BY Surabhi Rajan ON December 3, 2010 4:52 pm COMMENTS (3)

After reading repeated advice to Trim the Mutual Fund Port Folio, I have decided to take the first step. Plan it!

My existing portfolio is as follows:

There are 9 Funds, on which my Mutual Fund Agent initiated SIP in 2006 and 2007, of course I didn’t ask any questions and blindly followed. This was even before, I was knowing what is mutual fund and Equities.

Now, after reading articles on financial planning, mutual funds etc. (Thanks to Jago Investor, Valuereaserch, and mint money), I thought of a mutual fund portfolio as follows:

I have following queries to ask

1. Is my mutual fund selection good enough for a 20 year long investment period [I understand Reliance Power Sector Fund is a risky sector fund, but thought of being bit greedy on it 🙂 ]

2. How systematic transfer plan works? Could we use it between two Fund Houses? For example if I want withdraw money from ICICI Pru Dynamic Plan and Invest in DSPBR Top 100 Equity Fund, could I make use of Systematic Transfer Plan?

3. If the above idea is not possible, what is the best way to achieve this?

4. Any other thing I should look at?

Thanks a lot for the time,

Regards, Surabhi R


3 replies on this article “Mutual Fund Portfolio Trimming & Systematic Transfer Plan”

  1. Ramesh Mangal says:

    I think review can be done every year, but a single year down performance should only label it as a red flag, not to be chopped away immediately. 3 years is a good enough time for any fund to be “chopped” away. You also need to find the reasons for the severe underperformance (like change of manager, etc).

  2. That was a real good response, Thanks a lot Ramesh for finding time and analyzing things for me. Frankly speaking, I did not expect such an informative and detailed answer. So the mutual funds in my current port folio were good enough to hold, I thought the other way.

    I was just choosing funds based on Valueresearch and Morning star rating, It did not occur to me that, the rating of mutual funds could change by every quarter. Is 3 year good enough to review the mutual fund selection or should it be done for every year?

    The information about STP si very useful, Actually I was not getting proper information about it on net.

    Thanks & Regards, Surabhi

  3. Ramesh Mangal says:

    The first thing in Planning is why! In my opinion, just blindly following that you should have an arbitrary number of funds does not work.
    First have a look at your current portfolio.
    1. You have 3 multi-cap funds (Fidelity India Special situations f, Reliance equity opportunities f and ICICI dynamic f) which can invest anywhere in market, from good fund houses, very reasonable expense ratios (1.8-2.0%). FISSf and REOf are stock-picker funds, these assess good stocks/opportunities and hold them for a long term. Keep them as side-funds, not the core of your portfolio, but they should be kept. They are a long-term hold. Dont change them. These 2 funds have 20% of your portfolio.
    ICICI Dynamic is also a multicap fund. Though it has some choppy performance, but this fund has a very good downside protection. So though in secular bull-runs, this fund may falter than some of the rest. Overall through multiple bull and bear phases, this fund should have a very good return with less volatility than others. Two years ago, this fund was a 5-star fund in valueresearch. This is a good fund for a core holding.
    2. You have two sectoral funds – ICICI Infra and Reliance DPS. Both these funds are infrastructure related sectoral funds, but behave more or less as diversified equity funds. Here, I can agree to the change you have mentioned. But I would recommend you to not exceed this sectoral portion of your portfolio beyond 15%. (Another player that I can recommend is Reliance Infrastructure f, which is pure-play infra fund.) The infrastructure theme should be kept for a very long term (5-7 years).
    3. Then you have 4 tax-saver funds. All the 4 funds have given very reasonable returns, and there is no other reason to change or pick one or the other. Keep any 2 and change the other 2. My personal preference is Fidelity and Sundaram.

    Now coming to your changed portfolio. You have selected a pure large cap, a large-mid cap, a mid-small cap, a sectoral and a tax-saver. Nothing wrong with the proposed selection or allocation, but you need to weigh in the advantages that you have got in doing this whole exercise. In my view, keeping 3 or 4 multicap funds is same or better than keeping them separated as large, large-mid and mid-small cap categories.

    Coming to your queries.
    1. Is it good enough for 20 year long investment period? Can’t say. The MF ratings change every quarter and if you have gone for these funds because of that, one thing is sure, most of your current 5-star funds will not remain in this category. How do you propose to react at that time? The bottomline = a periodic review of the mutual fund portfolio is necessary.
    2. STP is good in case you have a large chunk of money which you do not want to invest in a lumpsum in equity. Then you can keep it in a short term / liquid debt fund, and transfer a fixed amount into an equity scheme. Transferring from debt to equity does not have a transaction cost (unless the debt fund has an exit charge). While transferring from
    from equity / equity oriented hybrid funds, there is a 0.25% charge plus whatever exit charges are applicable. And STP does not work between 2 funds of different fund houses. Also your idea of transferring from one equity fund to another does not have any benefit!

    My proposed action plan.
    1. Keep the 3 multicap funds.
    2. Switch your ICICI infra fund to ICICI dynamic fund (lessens your fund by 1 as well as your sectoral exposure). Your multicap exposure is about 35%.
    3. Liquidate reliance and sundaram/hdfc taxsaver as per availability. From that, you can buy a single large/large-mid cap fund. Either hdfc top 200 or DSPBR 100 or franklin blue chip are ok. You can also switch sundaram taxsaver to sundaram SMILE or midcap select fund (if you are hell bent on keeping a mid-small cap fund).
    Finally, you will be having 3 multicap, 1/2 taxsavers, 1 sectoral and 1 largecap.

    One more thing, whatever percentages you allot a fund, over a period of time, that percent will change. So do not be rigid in keeping a particular amount in a fund. 🙂

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