Skewed asset basket

Coimbatore-based marketing professional, Appavoo Muralie, has played the stock markets and real estate to gain good returns. But it’s time he invested in mutual funds and debt instruments to add stability to his lopsided portfolio.

It’s not only the reckless and inexperienced investor who dives directly into the troubled waters of equity. Even the 40-year-old A. Muralie has done exactly the same for the better part of 15 years. The fact that he’s financially healthy suggests that he’s got the intelligence and patience to make such a high-risk strategy work.

The sole breadwinner of a family of three, Muralie works in a textile company in Coimbatore. Over the last 15 years, Muralie has planned his investments well.

He has invested heavily in real estate; he purchased an apartment in Coimbatore in 2002 and a plot in the suburbs of the city in 2006. He made a down payment of 15% of the apartment’s cost and took a loan at 9% floating interest rate to service the rest of the payment. The total EMI amounts to Rs 27,000.

He is also an aggressive player of the stock markets, mainly subscribing to public issues. Since 1992, he has picked up 100-200 shares each in some 25 companies. His portfolio includes Reliance Energy, L&T, TCS, Dhanalakshmi Bank and Gillette among others. This is a diversified basket of scrips, many at IPOs. Needless to say, he as had his share of both winners and losers. Throughout the turbulence, his patience and ability to access useful information has stood him in good stead. “I regularly refer to magazines and newspapers forthe right inputs. I don’t consult a planner or fund manager,” he says.

While debt is absent in his portfolio, Muralie has an insurance cover of Rs 26 lakh. He has policies in five different schemes, including an LIC money back policy, three LIC endowment policies and an ICICI Pru Life-II ULIP.

We believe that while Muralie is doing fairly well, the absence of debt and an over-weightage to direct equity has skewed his portfolio in ways that increase his vulnerability to risk and volatility in the markets. Equity beats other forms of investment in generating long-term returns but it also carries risks. Handling stock market gyrations requires both expertise and time. A portfolio of mutual funds can give smoother and more secure returns. The exposure to debt ensures a degree of safety if there is a period of prolonged bear run. If Muralie spreads out his allocations across these new asset classes, his returns will fluctuate less.

We recommend that he institute a systematic investment plan on a monthly/quarterly basis and investin equity diversified funds.

Muralie’s direct equity kitty is worth Rs 10 lakh or more. He has spent many years in the markets and some of his stock holdings have given him excellent returns. But he has selected IPOs haphazardly. Quite a few have been unprofitable.

Now is a good time to review the portfolio. Given the strong bull-run, many of his worst performers are breaking even at the moment. Muralie should exit scrips which have offered disappointing returns and transfer the money realised to good, diversified equity mutuals. If the market falls, such decent exit prices may not be available. In future, a more selective approach to IPO investing may fetch better returns. An early start isn’t always a good strategy when it comes to IPOs. Before applying, wait and watch how institutional investors react. If their interest in the issue is high, go ahead and apply.

If Muralie has not exhausted the Rs 1 lakh limit for tax exemption under Section 80C, he can consider investing in ELSS funds. These are similar to diversified equity funds, but come with a three-year lock-in and offer tax deductions under
Section 80C.

We also recommend investing in NSCs to add the missing debt component to his portfolio. Another option is debt funds with decent track records over a timeframe that meets Muralie’s specific needs.

As regards insurance, our advice has always been to opt for term insurance. However, considering that Muralie is in the middle of his career and two of his policies will mature in 6-7 years time, he should continue with them. Subsequently, he can take a term cover if he feels that his family is under-insured. If you are a first time mutual fund investor (like Muralie), keep these in mind:

- Choose a fund that is at least five years old so that you can track its performance.
- Don’t blindly invest in a fund that has posted great returns in a short time; ensure that this performance is consistent over three to five years. Peer group comparison of funds is also a must.
- Invest according to your needs. For short-term requirements, invest in debt-oriented funds and bank fixed deposits. Look at equityoriented mutual funds to serve your long-term needs.