The Hindu Business Line : Fund Talk

I ventured into mutual funds only last year. I have invested a lumpsum in Fidelity Equity (DP), SBI Bluechip (G), Reliance Equity (G), PruICICI Infrastructure (G), PruICICI Tax Plan (DR), HDFC TaxSaver (DR) Principal Tax Savings (G) and SBI Magnum Tax Gain (DP). I also have a systematic investment plan (SIP) in PruICICI Emerging S.T.A.R, SBI Magnum Contra, Franklin India Flexicap and Magnum Tax Gain. I am a long- term investor and would like to have a portfolio of 10 to 12 funds. Can you suggest funds for my core portfolio that have a moderate risk profile? Can you also suggest funds that can withstand the kind of volatility witnessed recently? How does one choose between growth and dividend options (DP- dividend payout, DR- dividend re-investment) among funds? Is a dividend reinvestment option in ELSS worthwhile, considering the lock-in period?

Rohan R.

You have a compact portfolio of about ten funds. In the absence of details regarding your investments in these funds, however, it is hard to determine which of these funds make up your core portfolio. Given your concern regarding the recent volatility, there are certain adjustments you can make to your portfolio.

You can start by exiting theme funds such as PruICICI Infrastructure. Admittedly, it has performed well in the short period since its launch. In the current context, however, it might be safer to stay invested in more diversified funds.

You have invested in several new fund offers, which are better avoided. It is too short a time-frame to comment on the performance of these funds, particularly SBI Bluechip or Reliance Equity, which were launched only three months ago. You can take comfort from the fact that, barring PruICICI Emerging S.T.A.R, they are predominantly large-cap funds. They are, therefore, likely to weather the volatile phase better than other diversified funds. Retain them and evaluate their performance in what is likely to be a testing period for equities. Do not discontinue your SIPs in Franklin Flexicap or PruICICI Emerging S.T.A.R, as it will prove counter-productive. But avoid further exposures in these new funds. Ideally, none of these funds should form a part of your core portfolio.

Among the tax-planning funds, continue with Magnum Tax Gain, HDFC TaxSaver and PruICICI Tax Plan. You can also consider Franklin India Taxshield, if you prefer a more conservative fund.

For your core portfolio, you can consider fresh exposures in funds with a large-cap bias, such as Franklin Bluechip, HDFC Top 200 and HDFC Equity. Funds such as DSP ML Opportunities and Magnum Contra will also make good additions, as they have shown greater resilience during volatile phases. Both funds have not only topped the charts consistently but have also outperformed the BSE 200 more than 60 per cent of the time in the three-year bull rally.

Choosing a dividend option is a tax-efficient way of cashing in on your investment. If you are nearing your retirement, have a low investible surplus, or are uncomfortable with volatility, you are better off opting for the dividend option. In doing so, you get to book profit periodically and sweep the dividend amount into safer investment avenues.

A dividend payout option may also be a good idea in the case of mid-cap funds or theme funds where the bulk of the returns are earned in short periods. But do not rely on the dividends as a source of income, as declaring dividends is completely at the fund's discretion. Check whether the fund has a history of paying dividends every year before you choose the dividend option. And remember that the payouts may vary.

Otherwise, as a long-term investor, short periods of volatility should not deter you from choosing the growth option, as it tends to outperform the dividend option over the long-term. Dividend reinvestment is suitable for investors who want the tax-efficiency of a dividend option but are willing to stay invested across market phases. Its returns do not differ from that of the growth option.

There is no harm in opting for either growth or dividend reinvestment for a tax saving fund, as it will, in most cases, ensure superior returns on exit. You can consider the dividend option as a cautionary measure, as a timely dividend may help tide you over in case of any uncertainty.

Shanthi Venkataraman

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