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I want to diversify a part of the funds, which is now invested in income funds and Monthly Income Plans (MIPs) into equities. Could you suggest whether balanced or equity funds are the better choice for investing? My investment horizon is 1-2 years.

Srinivasan Rammoorthy

Mumbai

It is unrealistic to expect good returns from equity investments over an investment horizon of just 1 or 2 years. Especially if you start investing in the middle of a bull phase after stocks have risen sharply. Stocks may, over a long holding period, deliver higher returns than debt investments.

But the equity market seldom climbs steadily or consistently from year to year. It delivers abnormally high returns over a short period and then may "correct" sharply, and lie low for several months, even years. So when you invest in the midst of a bull run and plan to hold only for a couple of years, you expose yourself to significant downside risks.

If you would still like to diversify into equities, we suggest that you switch a small portion of your portfolio, say the 10 or 15 per cent that you can afford to risk, into diversified equity funds with a good track record. You may consider funds such as Templeton India Growth Fund, HDFC Top 200 Fund and HSBC Equity Fund. Remember to spread out your investments through Systematic Investment Plans, to reduce the risk from timing.

Balanced funds would certainly expose you to lower levels of risk than would pure equity funds. But there are fewer balanced funds with a good track record, than there are equity funds. And direct investments in equity and debt funds often deliver better returns than balanced funds.

Fund of Fund products can be substitute your fund portfolio. But wait for more offerings before switching your entire portfolio into such products. For now, most funds of fund products invest only in funds managed by a single fund house. This may not provide you with adequate diversification across managers or investment styles.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.)

Aarati Krishnan

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