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I work in the railways as Office Superintendent with a gross pay of Rs 11,500 per month.

I am entitled to pension after retirement and have around nine years of service left. I want to build a retirement corpus through mutual fund investment.

I want to invest Rs 1,000 a month in a good ELSS scheme with a mid-cap orientation. Similarly, I want to invest another Rs 1,000 in a good equity fund, which invests in blue-chip companies with a large capitalisation.

At present, I don't have any savings, but I plan to make up the lost time to the extent possible. I look forward to your guidance.

M. Vasudev Rao

Vishakapatnam

With nine years to retirement, you do have a sufficiently long time-frame to consider investing in equity funds. But you should evaluate if you are comfortable with the risks of equity investing, in light of your present income, and pension levels likely on retirement.

Please evaluate if your pension will take care of the basic living, medical and emergency expenses for your family after retirement.

You should also invest in pure term insurance to cover your life (refer to our detailed article on "Funding your retirement", Business Line, December 12, 2004).

Only the savings after taking care of these needs may be invested in equity funds.

Though equity funds have delivered impressive returns over the past couple of years, their returns can swing widely from year to year.

They are not a safe or a stable source of earnings, which can regularly supplement your monthly income or pension.

The risks associated with equity investments are especially high after the sharp appreciation in the stock market over the past couple of years.

If you stay invested for a 9-10 year horizon, you would have some time to ride out the ups and downs of the stock market.

But the decision to invest in equity funds would still hinge on how comfortable you are with sharp fluctuations in the value of your portfolio.

If you are comfortable with equity funds, HDFC Top 200 Fund, Franklin India Bluechip and Templeton India Growth Fund would be among the preferred choices for large-cap funds.

These funds may give you returns that add up to 10-12 per cent per annum, over a nine-year period. The large cap funds may be less risky than funds that invest mainly in mid-cap stocks.

The recent Budget has changed the framework for investments in ELSS funds.

The old framework for ELSS funds lapses on March 31. ELSS funds may now be included in the new Section 80C and may be eligible for tax breaks up to a limit of Rs 1 lakh.

But there continues to be some uncertainty regarding the new rules for ELSS funds, as the new tax laws are yet to be notified.

Therefore, before investing in an ELSS fund it may be better to check with the fund house or the distributor, to ascertain when you should invest, to benefit from the new tax laws.

HDFC Long Term Advantage, HDFC TaxSaver, SBI Magnum TaxGain and PruICICI Tax Plan would be the preferred ELSS funds, if you are keen on a mid-cap focus.

Do note that mid-cap funds carry a high-risk profile.

(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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