The Hindu Business Line : Sell stocks ahead of funds

I invested Rs 3.16 lakh in March 2001 in the Franklin India Bluechip Fund at an NAV of Rs 15 per unit. The amount invested was the gratuity received by me after I took a VRS from a bank. Over the years, I have received regular dividends. Since the NAV has risen to Rs 26.25 now, I am in a dilemma whether I should continue the investment in the fund or encash the units. Since I have substantial exposure to equities directly, I do not want to invest the proceeds again in the stock market. Please advise me on whether I should continue the investment or book partial profits. If I encash the units, where should I invest the funds?

Narayanan.V

Chennai

If you are keen on cutting back exposures to the stock market, we would suggest you first liquidate the individual stocks that you own where you have made a sizeable profit.

An equity fund is likely to suffer lower value erosion than individual stocks during a market decline, because of its diversified portfolio.

This is particularly true of Franklin's Bluechip Fund, which is a conservative fund with a focus on frontline, large-cap stocks.

The fund will certainly be less vulnerable to a market decline than a portfolio of mid-cap stocks.

However, you should pare down exposures in the Bluechip Fund, too, if you feel too much of your portfolio is invested in the stock market.

You haven't mentioned the total size of your portfolio. But as you have invested your gratuity proceeds in this fund, we assume that it does form a large part of your overall savings.

If you fall in the above-50 year age bracket and cannot take any erosion in the value of your investment, you should cap your exposure to equities at 15-20 per cent of your savings.

It may not be advisable to rely on equity investments, even through a fund, to earn you a regular income for your retirement years.

The steady rise in stock prices over the past four years has made it possible for equity funds to pay out liberal dividends with regularity. But this need not necessarily continue, if the stock markets decline or enter a corrective phase.

The sharp uptrend in equity values over the past couple of years leaves any equity investment vulnerable to some downside risk, at this juncture.

We suggest that you take stock of your investments now, to evaluate how much of your savings are invested in equities. If this proportion is above 15 per cent, sell stocks or units and switch the proceeds into debt investments.

You can consider fixed return schemes such as the Senior Citizen's Savings Plan (if you are eligible) or the Post Office Monthly Income Scheme, if you are prepared to lock in your money for a while. If you are not looking for tax-exempt income, you can also consider fixed deposit programmes from banks and quality companies, which now offer interest rates of 6-7 per cent.

Balanced or hybrid funds with a small equity exposure are also an option, if you are not entirely risk averse. Consider funds such as the HDFC Multiple Yield Fund and PruICICI Income Multiplier Fund. These funds are balanced and invest the major portion of their portfolio in debt instruments, while capping their equity exposure at 30 per cent.

Because they do not have a monthly dividend obligation, they also offer better returns on their debt portfolios than the typical monthly income plan.

(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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