Ask Morningstar: A portfolio too focused on one fund house

By Mohasin Athanikar |  23-03-22 | 
 
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About the Author
Mohasin Athanikar is an Investment Analyst for Morningstar Investment Adviser India.

At present, I have Axis Bluechip and SBI Small Cap in my portfolio. What can I add to it? My investment horizon is 7-8 years. These are what I am thinking of: Parag Parikh Flexicap, SBI Flexicap, SBI Focused Equity, SBI Magnum Midcap, DSP Midcap, SBI Equity Hybrid.

An asset allocation-based approach (mix of equity and debt) is advisable for investing towards one’s goal, as it improves the risk-reward potential of the portfolio and provides for a less volatile portfolio experience. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with the potential to deliver superior inflation-adjusted returns compared to fixed-income. It is advisable to get your risk appetite assessed before deciding upon the asset allocation.

Diversification is an important aspect to look at while building your portfolio, as it cushions the portfolio against any adverse movements in a single asset class/security. Asset classes, (viz. equities, fixed-income, gold, etc.) and even securities within an asset class respond differently to the same set of economic drivers, and hence the benefits of diversification. Asset allocation need not always be between equity and debt only, it can involve any combination of assets classes and should be in line with the risk appetite of the investor.

Note that valuations play a crucial role while entering any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. One should be cognizant of the prevailing valuations at the time of investment, and make allocations accordingly. You should periodically rebalance your portfolio to your recommended asset allocation at periodic intervals.

You should periodically (say on an annual basis) evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.

Assuming a moderately-aggressive profile, given the medium time horizon of 7-8 years, here is my portfolio suggestion with a 70% exposure to equities:

  • Large-cap equity: 43%
  • Mid-cap equity: 10%
  • Small-cap equity: 5%
  • International equity: 12%
  • Debt: 30%

The international equity allocation offers diversification across geographies and also acts as a hedge against rupee depreciation. For investment in fixed-income, you can consider fixed income funds with a high (safer) credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Short-duration funds and Medium to long term funds. One could also look to have about 5-10% exposure to gold, from a diversification perspective as gold has a low correlation with other asset classes and is seen as a safe-haven asset in times of global risk-off sentiment.

Your current allocation via SIPs is entirely into equity schemes – one large-cap and one small-cap fund. One should also look to have some allocation to active fixed-income funds since these provide flexibility/liquidity to meet any unplanned emergency needs and also do not incur any penalty (as in the case of fixed deposits) for pre-mature withdrawals. You could add funds to your portfolio depending on the asset-allocation mix desired in line with your risk appetite.

The current mix of prospective funds listed by you are mostly from SBI Mutual fund. It is advisable to diversify your allocation across funds from various fund houses (depending on the allocation) to avoid concentration to the sector / style bets of a single fund house.

DSP Midcap

The fund has outperformed its peers in 3 of the past 6 calendar years, but its performance since 2020 has been subdued. The rolling-returns over the past 7 years put it in the top quartile (3- and 5-year daily roll). Though Vinit Sambre oversees this growth-oriented strategy, the fund is co-managed by Resham Jain since March 2018. We do have conviction in Sambre's skills in the mid and small-cap space.

Parag Parikh Flexicap

The fund invests in a mix of domestic and foreign equities, with around 30% in U.S. heavy weight stocks. Since May 2013, the fund has been managed by Rajeev Thakkar (domestic equity) and Raunak Onkar (global equity).  The foreign currency exposure is hedged to the tune of about 75%. Due to suspension of flows into overseas securities, currently incremental proceeds are being invested entirely into domestic equities. It has outperformed its flexi-cap peers in 1, 3 and 5-year trailing returns.

SBI Magnum Midcap

Sohini Andani has been managing this fund since July 2010. The portfolio has a high growth tilt and holds about 60 stocks. The fund underperformed its peers in 3 of past 5 calendar years, but has done well since March 2020 lows. The rolling performance has been poor over the past 7 years (5-year daily roll).

SBI Equity Hybrid

Since January 2012, this fund has been managed by R. Srinivasan (Equity) and Dinesh Ahuja (Debt). The risk-adjusted performance is better than that of its peers and it has outperformed over trailing 1, 3, 5 and 7-years. It was a top quartile performer over 3 of the past 5 calendar years. The rolling-performance in the last 7-years (3-yr daily roll) is above average. Overall, the portfolio is large-cap blend with a slight growth tilt. Net equity levels in the last 3 years have ranged around 66% to 75%.

SBI Flexicap

R Srinivasan took over this fund in January 2022. The portfolio style is large-cap blend, and it offers a value tilt relative to its category peers. It currently holds around 50 stocks, with the top 10 cornering 44% of the portfolio. The fund underperformed its peers in 3 of past 5 calendar years.

SBI Focused Equity

R Srinivasan has been managing this fund since May 2009. It is a multi-cap, growth-tilted fund with higher exposure to mid caps, relative to its peers.

Top quartile performance in trailing 1, 3-and 5-years and top quartile rolling return performance (5-year daily roll in the last 7-year period). Good capture ratio split; Down capture is lower.

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