The Hindu Business Line : Equity funds for school admissions

If your target returns are not very high and you have a short investment horizon, a combination of debt and equity funds, or balanced funds may be better choice than pure equity funds.

I am 30, married and have recently become a father. I need money to enrol my child into a good school after three years. That might cost me nearly Rs 75,000. I am planning to raise this amount by investing in diversified equity funds through an SIP of Rs 2,000 every month. I have chosen Franklin Prima Fund, HDFC Equity and Magnum Contra Fund.

I am worried about the exit loads these funds would charge when I redeem units after three years. Is it good to invest in these funds despite the exit load, or is there any other way out?

Kiran

We suggest that you invest only a portion and not the entire sum that you plan to save, in equity funds. The SIP investments that you have outlined will entail a total savings of about Rs 72,000 over the next two-three years. You say you require a sum of about Rs 7,5000 at the end of three years.

Since your target returns are not very high and you have just three years to go, a combination of debt and equity funds, or balanced funds may be better choice for your investment than pure equity funds.

They may offer you prospect of reasonable returns, without a significant risk of capital erosion.

The funds you have chosen for your portfolio are good choices within the universe of equity funds. If all goes well, with the economy continuing its strong performance and corporate earnings mirroring this, these funds should be able to deliver a 10-15 per cent annual return over the next three-four years.

But there can be no certainty about equity market returns. Stock prices may rise sharply for a while and then remain flat. Or they may correct sharply, before catching up with earnings performance.

Since you have just a three-year time frame for your equity investments, you do not have much time to recoup an erosion in the value of your investment, if the market enters a corrective phase, either immediately or at any time over the next three years.

Returns from the stock market are dependent on multiple variables. Unpredictable factors such as FII flows and India's attractiveness relative to other markets and asset classes, are as important in determining your returns from an equity fund, as the domestic GDP growth or the earnings performance of Indian companies.

Keeping these factors in mind, if you would like your investments to enjoy a kicker from equity returns, we suggest you invest a small proportion of your savings in equity funds.

Of the Rs 72,000 that you plan to invest over the next three years, you can probably invest about 25 per cent, or Rs 18,000 in equity funds, through the SIP route.

This way, even if your equity investment does suffer a temporary correction in value at the wrong time, of say 10-20 per cent, it will not make a substantial dent in your savings towards your child's school admissions.

You can park the rest, about Rs 54,000, in fixed deposits of good companies.

The exit loads that funds charge if you prematurely redeem your investment should be the least of your worries. Funds usually charge an exit load if you terminate your SIP before the committed period or if you redeem within the first two years. You do not plan to do either.

Since the maximum exit load is at 2.25 per cent, it will not make a substantial dent in your returns, if your equity funds deliver as expected.

(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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