The Hindu Business Line : Fund Talk

I am interested in starting an SIP in 3-4 funds. Can you recommend some funds where I can start SIPs and continue them on a long-term basis? How long should an SIP be continued to get good returns?

Ranjit Nair

You can consider starting an SIP in the following funds: HDFC Top 200, DSP ML Opportunities, Magnum Contra and PruICICI Power. Birla Equity Plan and HDFC Long Term Advantage could be considered if you are looking for tax-saving equity options. Please note that, in the absence of information such as age, existing investments, risk appetite, and so on, this is only an indicative portfolio, recommended for the average investor with a moderate risk profile. You can add mid-cap funds such as Sundaram Midcap to your portfolio, if you have a higher risk appetite.

When you sign up for an SIP, avoid tenures longer than a year. Your monthly financial requirements may change from time to time and you do not want to commit your money too early. The idea behind investing through SIPs is to minimise the risk of poor timing. For instance, you avoid the risk of investing a large sum of money at a market peak. It also helps investors build financial discipline by regularly investing in equity, irrespective of the market levels. It is for this reason that SIPs must be viewed as a long-term investing option.

Investing in SIPs in a bull market and then discontinuing them when the market takes a downturn will prove counter-productive. In a steadily rising market, you will incur an opportunity loss as you postpone your investments in equity. In a declining market, you will lower your average cost, but until the equity market picks up again, you will not really benefit from the investment.

Invest through the ups and downs of the market over a long period, at least five years. This way, you can build wealth steadily. However, even as you invest through ups and downs, keep track of your overall equity allocation. Periodically book profit when the market rises to unprecedented levels, but resume investing when it corrects sharply.

Please advice if I should hold on to Magnum Equity Fund, Magnum Balanced Fund, UTI Index Fund and UTI Pharma.

Brig. A Thyagarajan

We assume that these are not the only funds in your mutual fund portfolio. Barring Magnum Balanced, we would not recommend any of these funds to be a part of your core portfolio. Magnum Balanced has been a top performer over the last three years. However, it has a tendency to make frequent "tactical" asset allocation calls, with its equity exposure alternating between aggressive and moderate, depending upon the market condition.

In recent months, this strategy has not paid off, as a higher allocation to equity during the market peak and a lower allocation in the months of June and July, when the market recovered, have affected performance. If you wish for a more stable mix of equity and debt, this fund may not be suitable for you. HDFC Prudence may be a better option.

Magnum Equity is not one of the top performers in the SBI Magnum Fold, although its performance over the past year has been good. You can consider switching to Magnum Contra, which has a greater track record.

Despite their recent underperformance, we maintain that active funds with a good track record are better choices for the long term than passively managed index funds. Given the improving depth of the market, funds are able to outperform by picking stocks outside the indices. You can sell UTI Index and consider exposure in a diversified fund with a good track record. The outlook is beginning to improve for the pharma sector. You can continue to hold UTI Pharma. But holding a sector fund calls for an active profit booking strategy and is, therefore, more suitable for investors who have a good understanding of industry dynamics.

Shanthi Venkataraman

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