The Hindu Business Line : How do I plan my portfolio?

I am planning to invest Rs 6000 a month through SIP for a 10-year time-frame. To spread the risk I would like to allocate Rs 2000 each to three different funds. After a brief study I have shortlisted Reliance Growth, Franklin Prima, Sundaram Midcap, HDFC Top 200, HDFC Tax Saver. Which three funds should I finalise for optimum returns over a period of time? Should I opt for the dividend payout option or growth option?

Yugesh Narayan

Chennai

All the funds you have short-listed have a good performance track record over a 3-5 year period. However, you should be aware that a portfolio of these funds would give you a significant exposure to mid-cap stocks, which may not be suitable, if this is to be your only equity investment.

Reliance Growth, Franklin Prima and Sundaram Mid-cap are all funds that invest mainly in mid-cap stocks.

HDFC Taxsaver, though a diversified fund, too has a significant mid-cap exposure. Only the HDFC Top 200 will fetch you a significant exposure to large cap stocks.

There is nothing wrong with holding a portfolio that is tilted towards mid-cap stocks, especially if you intend to hold it for a long investment horizon of well over ten years.

Over the long term, mid-cap stocks could well deliver higher returns than a portfolio of large cap stocks.

Many of the disadvantages associated with directly holding mid-cap stocks are also reduced when you invest through mid-cap funds.

However, if you plan to build a portfolio comprised mainly of mid-cap funds, you should be prepared for a very bumpy ride over your ten-year holding period.

In a bull market, mid-cap stocks usually tend to surge far ahead of the large caps.

But in a market decline, or under bearish conditions, you should expect your portfolio to lose much more value than the market. Mid-cap stocks tend to be much more volatile than frontline or bluechip stocks because they represent companies that are in the early stages of their growth trajectory.

The stocks also carry liquidity risks, with trading volumes likely to surge in a bull market and dry up in bearish conditions. All these risks are particularly heightened now, after the big surge in mid-cap stock prices over the past couple of years.

If you feel you can handle a bumpy ride, we suggest you invest in Franklin Prima, HDFC Taxsaver and Sundaram Mid-cap Fund.

If you prefer to be more conservative, consider HDFC Top 200, HDFC Taxsaver and Franklin Prima. We suggest that you don't commit to a ten-year SIP at the outset. Commit to SIPs in these funds on year at a time, so that you will have the flexibility to change your investment mix when you desire.

Do check back on the performance of every fund you own at least twice a year, to replace a fund that trails its index and peers by a big margin.

If you are risk-averse, go for the dividend option. If not, investing in the growth option may be the best for a ten-year time frame, as the compounding effect will add substantially to your investment returns.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.)

Aarati Krishnan

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