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I have invested Rs 6 lakh in Reliance Vision Fund on March 11, 2004. I based my decision on the fact that equity funds gave a higher return than bank investments. However, I was not sure about the timing of investment. What is your opinion on my timing and the scheme that I chose? Is it a good idea to stick to this scheme for five years or is it better to go for further diversification? - Ganesh Dalvi

You have certainly assumed too much risk by investing such a large sum at one go, and by singling out one fund for investment. First, you need to note that all diversified equity funds carry some downside risk. This means you could lose a significant part of the capital you invest if the equity market changes direction.

This risk is very real, after the sharp rise in equity values over the past year. So, the comparison with bank deposits is really misleading. In bank deposits, you are sure of getting back your principal and a fixed return on your investment.

While last year was an exception, an expectation of 15-20 per cent from your equity fund would be normal; and this only if you are prepared to stay invested for a 5-10 year time frame. If you do wish to invest in diversified equity funds, you should invest in small lots spread out over several months. Take advantage of the systematic investment plans offered by fund houses, which allow you to invest through equal monthly instalments. This would reduce the risks arising from timing.

It would also be better to allocate your investments between two or three diversified funds, so that you do not rely too much on a particular fund manager, or investment style, for your returns. Reliance Vision Fund does have a good performance record over the past two years; but it underperformed the indices in the bear markets of 2000 and 2001.

High portfolio churn and an aggressive investment style also make the fund among the riskier choices among equity funds. Stay on if you are comfortable with the risk profile; but do switch part of your investments to two other funds — say, Franklin Bluechip Fund and HDFC Top 200 Fund.

Aarati Krishnan

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