The Hindu Business Line : Concerns about capital erosion

I am a practising advocate in Sonipat, working with my father. My father has all along been investing in bank deposits. I have recently started to park my money in mutual funds. But I don't have a clear picture of my investments and whether I have taken the right path.

I have invested Templeton India Growth fund, Franklin Flexicap, HSBC Equity and Reliance ELSS fund. I am considering investing my current savings in HDFC Top 200 or SBI Multicap Fund? I am confused and apprehensive of my capital being eroded for the sake of better returns.

Should I adopt the SIP route in a rising market? What prevents me from investing in performing funds is the entry load and the high NAV. Should I seek more information?

Vikram

Sonipat

You should definitely seek more information before making your investment decisions. Three basic questions to ask before investing are:

What returns am I targeting, and over what period?

Based on this, where would I like to invest — equities or debt?

To select the right fund, how has the fund performed in the past five years?

Now let us take your queries, one at a time.

All of the funds you have invested in are diversified equity funds. They invest in shares of companies from a wide range of sectors.

Being equity funds, these funds do carry a risk of capital erosion. These funds are also likely to offer volatile returns — returns can be very high in one year and can turn negative in others. You may also have to hold on through long periods when the fund doesn't earn you any returns.

Over a long holding period of, say, 5-10 years, the performance of equity funds will broadly trail increases in corporate earnings.

Given the growth expectations from the economy, it may be realistic to expect a 10-15 per cent annual return from equity funds, if you hold for a 5 to 10-year period. But remember, there is no certainty about these returns.

If you want some additional returns from your savings, without the risk of significant capital erosion, you can park about 10-15 per cent of your savings in equity funds.

Choose just 3-4 funds and keep adding to your holdings in these funds, instead of looking for new funds every time you have money to invest.

In your choice of funds, opt for diversified funds with a good five-year record. Templeton India Growth Fund, HSBC Equity, HDFC Top 200 may be good choices for your portfolio.

Don't be concerned about whether a fund's NAV is high or low. Whatever the fund's NAV, it represents the current market value of the stocks in its portfolio. Whether you are buying into a low or a high NAV fund, remember, you are buying into the current levels of the stock market.

A lumpsum investment will deliver better returns than a SIP in a rising market. But the problem is, you never know whether the market is going to rise or fall after you make your investment. Phasing out your investments through systematic investing, is a way to ensure that you don't expose too much of your savings to a particular level of the stock market.

(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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