The Hindu Business Line : Fund Talk

I want to purchase mutual funds for saving tax and as an investment option. I had bought ELSS (Tax Saving MFs) last year from PruICICI, HDFC TaxSaver & Fidelity. I have following queries:

1. I am planning to purchase 2-3 more ELSS schemes. Which ones should I go for, considering my risk profile and current market situation? Please suggest with percentage allocation.

2. I have invested in stocks in past. But given the current market volatility, I would like to shift from stocks to mutual funds. What allocation would you suggest for stock vs MFs?

3. Please suggest 2-3 schemes (non tax-saving) with proportion of allocation.

Ashish Ladha

Equity-linked savings schemes are a good option even outside the ambit of tax-breaks, as a few of them have notched up an impressive performance record over a five-year period. But to allocate your entire tax-savings for the year to equity investments would not be appropriate. Small savings schemes such as NSC, PPF or the five-year bank deposits would assure protection of your capital. It may not be a wise move to expose your tax-savings to the risk of capital erosion.

HDFC TaxSaver and PruICICI Tax Plan appear to suit your risk profile. These also have a solid track record. We do not recommend new funds until they prove themselves. Having entered Fidelity Tax Advantage you have to stay on till the lock-in period and take a call based on the fund's strategy and performance.

If you have entered the above funds through systematic investment plans, you can continue the same except for Fidelity. You can instead add Franklin India Taxshield, as this large-cap fund will balance the mid-cap bias in the other two. Allocation to HDFC TaxSaver, PruICICI Tax Plan and Franklin India Taxshield can be made in the proportion of 50 per cent, 30 per cent and 20 per cent respectively. These three funds should suffice for a tax-break.

Your plan to route a part of your equity investments through the mutual fund route is good. The allocation between stocks and mutual funds would entirely depend on what kind of an investor you are.

If you are a short-term investor acting on `trading tips', it may not be judicious to allocate more than 10 per cent of your equity investments to stocks. The rest of your equity allocation can be parked in mutual funds, which can do a better job of active portfolio management.

A slightly higher allocation to stocks, say 20-30 per cent, can be set aside if you satisfy the following:

— You are an astute investor with the requisite time and skill to analyse companies and make an informed decision on your picks

— You are positive about the growth potential in the stocks or themes you are invested in, and are willing to hold for a period of 4-5 years

— You are not swayed by market sentiments or temporary blips

If you do not fit into the above, it is best to route equity investments through mutual funds. Equity investments are, however, subject to volatility, irrespective of whether they are in stocks or mutual funds. Mutual funds are a safer alternative as they offer diversification and are professionally managed.

You can also rejig your stock investments to accommodate more large-caps in your portfolio, as they are less volatile.

You can route the slightly risky bets through mutual funds. Sundaram Select Midcap, HDFC Equity, Magnum Contra and Franklin India Prima are non-ELSS schemes that will allow you to take exposure that suits your risk appetite. Their portfolios will have a bias for mid- and small-caps that carry higher risks but have potential for high returns.

Vidya Bala

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