The Hindu Business Line : Investment for long-term

I am an NRI and I have accumulated various new funds over the last two years. I have earned healthy returns from them. Based on your columns, I have now decided to restrict my portfolio to just five-six funds and slowly shift money from my funds into this new portfolio. I have an investment horizon of five to seven years. I have the following funds in mind. Please tell me if the choices are good for a long-term investor. I plan to start SIPs in Franklin India Prima Fund, Templeton India Growth, Franklin India Blue Chip, HDFC Equity, HDFC Top 200, HDFC Capital Builder, Magnum Contra and HSBC Equity Fund.

Ajay Sreenivasan, Abu Dhabi

Your decision is well-timed and you have made the right fund choices. With stock market valuations at rich levels, we think that equity fund investors may have to prepare for a period of slow or even negative returns from the funds they own, over the medium term. In this scenario, it appears to be prudent to invest in equity funds that have performed better than the market during previous sluggish or bear phases. All of the funds that you have shortlisted, except HSBC Equity Fund, fit the bill and have survived previous bear phases quite well. This increases your chances of faring better than the broad market, should the markets enter a corrective phase.

Yes, many of the new fund offers that you have subscribed to, have fared exceptionally well over the past few months. Many of these are theme-based funds that focussed on sectors that have the potential to outperform the markets. However, theme funds, because they take concentrated exposures to the prevailing growth stories in the market, may be more vulnerable to a meltdown in equity values, than would a diversified equity fund.

Having earned generous returns by piggybacking on these themes, you can now reduce the risk profile of your portfolio, by switching the bulk of your investments into diversified funds with a proven track record. This strategy may be especially suitable for you as you plan to stay invested over the next five to seven years.

As you make this move, you may also have to tone down your return expectations to a significant extent. First, stock market valuations are rich and seem to capture much of the earnings growth potential over the next couple of years. Returns on the stock markets, and on equity funds, over the next couple of years, appear unlikely to match the scintillating pace that they have set since 2003. Second, the diversified funds that you have selected for your portfolio are unlikely to deliver the returns that are possible from theme-based funds in a rising market. Many of these funds regularly figure in the middle, rather than the top, of the performance rankings each year.

Third, you should also note that investing through a systematic investment plan could lower the returns on your portfolio, should the markets continue to rise. SIP investing is a good tool to reduce the risk of bad timing when you enter an equity fund. But in a steadily rising market, SIP investments have the effect of postponing your purchases and will underperform the option of investing a lumpsum at the earliest date.

(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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