My wife and I are both aged 32 and we have a five-year old daughter. We have been investing in mutual funds through the SIP route for the last five years. We have taken out money when we thought the market was over-heated although we did not stop the SIPs. While we have made investments in the stock market directly, our exposure is nil currently as we plan to have a strategy of investing in top mutual funds.

We are currently running SIPs in the following funds: Birla Sun Life Tax Plan, Birla Sun Life Frontline Equity, HDFC Equity, HDFC tax saver, DWS Alpha Equity, DSP BR Equity, DSPBR T.I.G.E.R, DSPBR Top 100, DSPBR Tax Saver, Sundaram Capex Opportunities, Sundaram Tax Saver, Magnum Tax Gain, HSBC Equity, ICICI Pru Tax plan, ICICI Pru Infrastructure, Reliance Tax Saver. Kindly suggest how to restructure the equity/debt, proportion.

I intend to move away from tax saving funds as I feel diversified funds are giving better returns. I also have my insurance premium and ongoing home loan for claiming tax deduction.

Ran Vijay Singh Mysore

As you have rightly mentioned, there are too many tax-saving funds in your portfolio — seven of the 16 funds are equity-linked savings schemes. It is also true that most tax saving funds have underperformed their diversified peers. The three-year lock-in does not appear to have provided any additional advantage to these funds, in terms of managing the volatility witnessed in the market or generating higher returns.

Whether it is in mutual funds or any other investment option, tax savings can only be an incidental benefit. One should not settle for tax-saving products at the cost of compromising on superior wealth-building strategies. In insurance policies too, go for those products that offer protection or pension benefits that suit your requirements; buying these products for tax deduction should not be your primary objective.

You do not really need to exit all tax funds. You can consider holding on to HDFC Tax Saver and DSPBR Taxsaver. But review their portfolio and compare performance with diversified peers at least every quarter. We would like you to add a few other diversified funds in place of tax-savers. Given your age and income profile, we assume you can stomach some risks.

We, therefore, suggest a mix of aggressive and consistent performers. Hold on to HDFC Equity, DSPBR Equity and Birla Sun Life Frontline Equity. Continue your SIPs in these funds with periodic review, before renewing the SIPs. Add some mid-cap funds such as IDFC Premier Equity and Birla Midcap. For some international exposure, buy into Templeton India Equity Income. Let these funds account for 70-75 per cent of your equity mutual fund exposure.

Game for theme?

If you are willing to take some risks through sector funds go for Reliance Pharma and switch to Sundaram Capex Opportunities instead of DSPBR T.I.G.E.R. However, you would have to time your entry in sector funds and also resort to active profit-booking. Over the next two years, invest in these funds on declines linked to broad market, rather than resorting to SIPs, and book profits by setting reasonable target returns.

Since you have dealt with direct investing as well, you can consider adding Nifty BeES and Junior Nifty BeES on market declines of 10 per cent or more. The former has been the top performer last year among the major indices. The theme funds, together with the ETFs, can account for 25-30 per cent of your equity mutual funds. Note that, unlike direct investing, where the rise and fall in your portfolio may be steep, mutual funds aim at reducing this volatility. Therefore, look for consistency in performance, rather than the fund's rank in the performance chart. Ability to beat the respective benchmark and presence in the top quartile of the performance chart are good reasons to hold a fund.

Asset allocation

You seem adequately invested in real state. While this asset class would typically dominate a good chunk of your portfolio, consider diversifying to other options such as debt and gold (though ETFs) as well. You have not mentioned your debt exposure. We presume you must be contributing to the employee's provident fund through your organisation.

You can hold about 30 per cent of your money in debt at this juncture, and hike this as and when you need to meet objectives, such as child's higher education and as you near retirement. For now, you can hold HDFC MIP Long Term and your wife can consider investing in UTI Mahila Unit Scheme. Besides these, do actively scout for fixed deposits of corporates with high creditworthiness. Check with your financial advisor on the credit rating.