The Hindu Business Line : Fund Talk

I would like to invest with a time horizon of 20 years for retirement planning. I want to take advantage of both debt and equity through the mutual fund route. Which of the following methods will you recommend for the same:

— Investing lumpsum in debt funds with systematic transfer to equity fund;

— Investing lumpsum in equity funds with systematic transfer of capital appreciation to debt fund;

— Investing in balanced funds;

Kindly suggest some core and satellite funds for the same.

Mahesh

The mode of investing to adopt will depend on your desired asset allocation as well as your willingness to monitor your investments regularly. A balanced fund will give you exposure to both asset classes and will automatically re-balance your investments in a pre-determined ratio. Balanced funds are also a tax-efficient way of re-balancing your portfolio, as the fund will not attract capital gains tax when switching between equity and debt.

However, barring a few balanced funds, such as HDFC Prudence, direct investing in debt and equity funds have often been a superior option to investing in balanced funds. If you are willing to manage your asset allocation more actively, you have the freedom to choose the best of equity and debt funds across fund-houses and maximise your return potential. Also, balanced funds tend to maintain a standard asset allocation pattern with a bias towards equity or debt, which might not be suitable if your requirements and risk profile change over time.

Using systematic transfer plans, as in the first two options, does help automate your asset allocation. However, it is important that you determine your equity allocation pattern, at least for the next couple of years, or else you risk being under-invested in the asset class.

For instance, if you would like a 55-60 per cent allocation to equity and have a lower allocation to the market right now, opting to put a lumpsum in debt funds would further bias your portfolio towards debt. The first option is suitable only if you want to slowly increase your allocation to equity. But given your long-term horizon, you might want to be more aggressive in equity now and gradually shift to debt in the last couple of years to retirement.

As for the second option, it is a prudent practice to sweep some of your capital appreciation from risky investments such as equity to safer avenues.

Here, again, however, you risk being under-invested in equity if you transfer all your capital appreciation to debt, especially in a bull market similar to the kind witnessed in the last couple of years. One alternative is to opt for dividend payout option. As funds tend to book profits and declare dividends at market peaks, you could re-invest your dividend in debt in a timely manner.

Rather than go on autopilot through systematic transfer plans, re-balancing your portfolio in accordance with your asset allocation strategy would be a superior option, although it requires more time and effort.

A few large-cap diversified funds you could consider: HDFC Top 200, DSPML Opportunities, Franklin Bluechip, Magnum Contra and PruICICI Power. Sundaram BNP Paribas Select Midcap or HSBC Midcap can be considered if you would like some exposure to mid-cap stocks.

Among debt funds, money market and short-term funds appear to be better options than long-term debt funds for now. UTI Money Market, Templeton India MMA, Sundaram BNP Paribas Money can be considered. If you are looking for funds with a 1-3 year horizon and are not averse to a lock-in period, new launches of fixed maturity plans can be considered.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Shanthi Venkataraman

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