The Hindu Business Line : Fund Talk

I am 23 years old and in my second year of work. I can save about Rs 2 lakhs a year, of which Rs 75,000 I want to invest in ELSS (for tax-saving) and Rs 1,25,000 in other funds (purely for investment and wealth maximisation)

I have two questions: 1. How do I chose ELSS schemes to invest in? Do I go by the last 1-year/2-year/3-year returns, or some other factors? What is the weightage I should give to different factors? Which are the best ELSS schemes to invest in today? How many schemes should I invest in, and in what proportions?

2. As for the other Rs 1.25 lakh, what kind of asset allocation do you recommend (debt-balanced-equity and also diversified-sectoral-thematic)? What instruments of wealth maximisation other than MFs do you recommend? Which are the best schemes according to you at this point of time, with a three-year horizon?

Neha Mitroo

It is good that you have made an early start in investing your money. Your financial goals are, however, likely to change over the next couple of years and you will have to tweak your investments for tax-saving purposes and asset allocation accordingly. Our recommendation is based on the premise that you have a reasonable appetite for risk. Remember to put into equity only that money which you do not need for at least the next three years.

For tax-saving purposes, at this stage, you can afford to maintain a 70-30 proportion between equity tax-saving funds and debt. Five-year bank fixed deposits and public provident fund are debt options you could consider.

The factors that dictate the choice of a tax-saving fund does not vary much from that of typical diversified equity funds. As always, you must choose only those funds that have a good track record over a three-five-year period. Compared to other open-ended diversified funds, tax-saving funds tend to have a more stable asset base, thanks to the lock-in period. As the flows are regulated, fund managers are able to take a long-term view of the markets and perform better. Several tax-saving funds have, therefore, performed well in recent years.

However, about three ELSS funds should suffice to take care of your tax-saving requirements. Invest in a combination of large-cap and mid-cap funds, depending on your risk appetite. Franklin India Taxshield is a good option in the large-cap category, while HDFC Long Term Advantage and PruICICI Tax Plan have a good track record with their mid-cap bias. You could also consider Templeton India Pension Plan, if you are looking for a balanced fund.

Investments in equity linked savings scheme (ELSS) or tax saving funds involve a three-year lock-in period. There is the risk of erosion of capital in the event of a market downturn. Investing through a systematic investment plan (SIP) will minimise the risk of bad timing. Each monthly investment will, however, be subject to a three-year lock-in period.

For your other investments, you can invest about 60 per cent in equity, 10-15 per cent in balanced funds and the remaining in floating rate and money market funds. Several balanced funds now invest at least 65 per cent of their assets in equity. In making this allocation, your overall exposure to equity will still be at about 70 per cent. You could also consider investing in post-office monthly income schemes for your debt component and use the interest earned from the investment for your monthly contribution to equity.

At this stage, you do not have many options outside equity to maximise your wealth. If you are new to the equity market, investing in mutual funds is the best option. Stick to diversified equity funds, rather than sector or theme funds, which are better suited for informed investors who can time their entry and exit. Within diversified funds, maintain a mix of large-cap and mid-cap funds. Mid-cap funds have a higher risk profile but can perk up the returns of your portfolio.

Maintain a compact portfolio of four-to-five funds, aside from tax-saving funds, so that you can keep track of performance. A few options you could consider: HDFC Top 200, HDFC Prudence, Franklin Prima, Magnum Global, Magnum Contra and DSP ML Opportunities.

Shanthi Venkataraman

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