The Hindu Business Line : Fund Talk

I have invested in the following funds: HDFC Premier Multi-Cap, HDFC-MIP-Long Term Plan, Franklin India Flexi-Cap, Pru ICICI TaxPlan, Pru ICICI Income Multiplier, SBI Magnum Contra, Fidelity Tax Advantage Fund and ABN Amro Tax Advantage Plan. Do you have any reservations about any of the funds in the selection?

Suren

There appears to be no cogent strategy behind the selection, especially in the absence of information about the asset allocation across these funds. You appear to have invested in quite a few new fund offers, including tax plans. Our view is based on the premise that you have to take sizeable exposures to tax saving funds to benefit from the investment-exemption limit of Rs 1 lakh under the Income Tax Act.

As we have consistently maintained in our coverage of mutual funds over the years, we are not in favour of taking exposures in new fund offers unless they provide a specific investment niche that could provide value to the portfolio. Investments in open-end funds with a track record of at least five years will be our preferred approach. You may miss the buzz of a few new funds but this may be more than adequately compensated by the performance of funds with an impressive long-term track record. Going forward, if you have to invest in equity funds for tax purposes, you could spread planned investments across three funds - HDFC TaxSaver, HDFC Long-Term Advantage and SBI Magnum TaxGain. These funds have a mid-cap tilt. Over a three-year period, which is the minimum lock-in, the returns are likely to be attractive and can compensate for the risks.

You could also enhance exposures to Prudential ICICI TaxPlan, as it has a good track record. We will suggest a systematic investment plan starting in April and covering a twelve-month period. Fidelity Tax and ABN Amro Tax are relatively new funds. Having taken exposures, it will not be appropriate to switch now. You could retain the existing exposures, track performance for a year and then take a call. If they do not rank among the top five tax saving funds, you could switch to the indicated funds.

Retain your exposures in SBI Magnum Contra. It has been an excellent performer over the past five years and remains one of our preferred picks. We had taken a cautious view when Sandip Sabharwal, its fund manager, quit last year and wanted to observe performance under the new fund manager. The evidence of the past few months suggests that there has been no slackening in performance. You could divert a part of your planned incremental investment to this fund through a systematic investment plan. Franklin Flexi-Cap has a made a good start and, having taken exposures, you could retain them. We would, however, suggest a shift from HDFC Premier Multicap to either HDFC Top 200 or HDFC Equity.

We believe investing in a combination of pure equity and debt funds will be better than taking exposures in most monthly income plans. In this space, we do, however, like the positioning of the HDFC Multiple Yield Plan. You could consider switching your HDFC MIP and Prudential ICICI Income Multiplier to this fund, which invests could up to 15 per cent in equities that offer high dividend yield.

If the funds mentioned are your only holdings, you need to incrementally invest more in funds with a large-cap tilt. PruICICI TaxPlan and Magnum Contra, with the suggested investment options in the tax saving funds space, would put your exposure to mid- and small-cap stocks at appropriate levels. In the large-cap space, opt for funds such as HDFC Equity, Franklin Bluechip and Kotak-30. Just for your equity exposures, endeavour to move to a 60:40 tilt between large- and mid-cap stocks.

Do not get to a stage where you own more than ten equity funds, including the tax-savers. Ten funds, carefully chosen, should deliver the benefits of differing investment styles if you have a five-to-ten year perspective. This, as well as the systematic investment plan, is a must, especially in the wake of the sharp spurt in equity values.

If any of the chosen funds trail peers consistently for four to six quarters, do use that as an opportunity to re-evaluate your strategy. Also, it may be better to steer clear of new fund offers and avoid any investment in funds linked to the lure of a dividend.

S. Vaidya Nathan

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