The Hindu Business Line : Is SIP route advisable for four-year horizon?

If you already own two or three diversified funds, you can add a sector fund to this portfolio if believe that that a particular sector will deliver better returns than the market over the next year or two.

I am a salaried professional working in the private sector with a monthly salary of about Rs 30,000. I need investment advice. I have two dependents — my wife and one child. I would like to invest in a mutual fund with a three-four year horizon. Can I invest in the Reliance Banking Fund? Should I take the SIP route or should I invest at one go?

Saurabh Bhandari

Dharuhera

A sector fund would not be a suitable choice for your core portfolio. Sector funds can perform exceedingly well when the sector in question is in favour; but can deliver poor returns when the sector enters a cyclical downturn. Investing in and making money from sector funds, calls for active tracking of the investment and a good sense of timing when you buy and sell the fund.

Sector funds are therefore not suitable for investors who would like to buy and hold their investments, for the long term.

If you are interested in building wealth in order to meet your financial goals over the long term, we would suggest you consider diversified funds such as HDFC Top 200 Fund, SBI Magnum Contra or Franklin Prima to make your investments. If you already own two or three diversified funds, you can add a sector fund to this portfolio if you have strong reasons to believe that that a particular sector will deliver better returns than the market over the next year or two.

You also need to have a good idea of where a particular sector is poised in its business cycle and whether it will deliver market-beating returns.

In this context, Reliance Banking Fund has delivered impressive returns of over 200 per cent since launch, as banking stocks were re-rerated from a period of severe under-valuation. But we have recently recommended a "Sell" on Reliance Banking Fund, as valuations in the banking sector have already run up quite significantly.

The present valuations already seem to capture the growth prospects for these stocks over the next two years.

Therefore, it is our view that going forward, the sector as a whole may not offer scope for better than market performance (see Business Line, August 12, 2005). Given the sharp appreciation in index values over the past two years, you may have to invest in equities (or equity funds) with an investment horizon of more than three or four years, if you plan on investing now.

As the considerable under-valuation in the stock market already seems to have been corrected, returns from equity funds going forward, may not be of the magnitude that investors have enjoyed over the past two years. They are likely to be in the 10-15 per cent range.

After the liquidity driven rally of the past few months, you should also be prepared for the risk of a short term erosion in value, if there is a market correction.

To reduce these risks, we suggest you use the systematic investment route to make investments in diversified equity funds. It may be a better to avoid investing a lump-sum in equity funds at this juncture.

(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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