Subbu’s Solutions - 09 July 2010

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 Posted by subbu's solution on Friday, July 09, 2010

1. i) Sir, I intend to make some money by trading in Equity based index ETFs by allocating a small portion of my funds. My strategy would be to buy some units at every drop of index by about 2% and sell it on recovery of index. I am thinking of this strategy because market offers such opportunities very frequently as it happened recently when market over reacted to European crisis when index tanked by over 1000 points and swiftly recovered .I am willing to wait for say 1-3 months should recovery take longer. I am a firm believer that our economy is strong and there is little chance of market losing steam in the near future. I am not too sure about cost part of the transactions though. Is my thinking right?
(ii) Also, do ETF prices reflect real time index changes? - Francis A. D Souza

Dear Francis,
Let’s start with your first question.
Assuming you purchased a particular share for Rs 100. Now considering an index drop of 2%, let’s keep adding this particular share to your portfolio:

2. Dear Subbu, selection of mutual fund scheme is also a task in itself. So, I think investing in FOF is a better idea! Let the FOF manager select the better performing schemes!! What is your opinion? - Satish R. Talekar

Hello Satish,
Aptly put! However, investing in a Fund of Funds product is more expensive than investing a mutual fund. So bear that in mind, while choosing your investments.

3. I would like to invest in equity funds and have a high risk profile. Is it better to use STP route or invest through Flexi STP - Nikhil Girme

Dear Nikhil,
It’s good that you are able to assess your risk profile. However, even though your profile would be able to bear risks, it is important to understand the fundamentals of picking funds before you dive in to it.
Also, though they may seem tempting, stay clear of sectoral funds that invest only in a particular industry.
You could also average out your investments through a Systematic Investment Plan or park a lumpsum in a liquid fund and then transfer portions of it to equity through a Systematic Transfer Plan. Either ways, both options are good enough.

4.  Hi Subbu, what should be a baseline for me to consider that my portfolio has become overcrowded? – Girish Sumaria

Dear Girish,
Let me begin by saying that there is no magic number to the number of stocks that one should have in your portfolio. But from past experience, holding more than 20 stocks will become difficult to monitor and manage, unless you have help from others. However, if you do have help then the list of stocks that you could invest in can range from 25 up to 40 stocks.

Also, investing for the long term is a very good strategy, but to increase the number of stocks in the portfolio just because you get ideas from reports may not be a good strategy, as you would start worrying about the small holdings in your portfolio that are not doing so well and miss out on the big picture changes in the stocks where you have higher weight

For example: Let’s say you have a portfolio of 10 stocks with 10% weight and keep on adding stocks and come to a stage where you have 15 stocks, 10 with 8% weight, 3 stocks with 6% weight and 2 stocks with 1% each.

Now in this case if the 1% stocks are volatile and the company is not doing well, you may end up worrying about them so much that you miss out on a story on the 8% weight stocks. This could impact your portfolio seriously.   

The point here is: The number of stocks you should have will depend on your capacity to manage.