Financial Guidance - Excessive Diversification

Q . I am a regular reader of your column in DSIJ and have gained a lot of information from your comments and suggestions. I have invested in the following mutual funds since May 2010 in the form of Rs 5,000 as initial investment and then Rs 1,000 per month for the next three years for each of these mutual funds. Taurus Star Share JM Basic Fund (Dividend) Franklin Templeton Prima Plus Reliance Infrastructure Reliance Index Fund Tata Life Science Tata Select Equity ICICI Infra ICICI Services Industries Birla Mid-Cap DSPBR Focus 25 Fidelity Global Real Asset L&T Global Advantage Sunda- ram Capex Opportunities Kindly suggest hold/exit options for the above. My investment philosophy is to focus on ethical business organisations. I would like capital appreciation.

A. Dr Shafeeq, if you have been reading my earlier columns you would have noticed how I am against accumulating so many funds. Excessive diversification reduces returns and does not increase safety in any way. Coming to your portfolio, almost half your funds are thematic or sector funds. This increases the risk of your portfolio and may not necessarily increase returns. Having so many thematic funds pre-supposes that you know better than the fund manager which sector is going to out-perform.

A larger proportion of good diversified funds will improve your chances of high returns. As regards having ethical businesses in the portfolio, one can reasonably hope that only companies with reasonable corporate governance will find a place in the fund portfolios. But it is not necessary that all the stocks be Shariah-compliant, if that is what you are looking for. Benchmark Asset Management runs a Shariah Index Fund and that may serve your purpose.

I have left out any comments on the thematic and sector funds.All I can say is that you must reduce, if possible! Include good mainstream funds such as HDFC Top 200, Birla Sun Life Frontline Equity in good measure.