The Hindu Business Line : Fund Talk

I am 62. I have been investing in the PPF (Public Provident Fund) since 1968 and have a sum of Rs 12 lakh maturing in April 2007. As I would like a better return, I would like to commence investing in mutual funds. My query is whether I should withdraw my entire PPF investments on maturity to invest in MFs. Alternatively, would you recommend I withdraw part of the amount or stay invested in the PPF itself for an assured return? Do suggest a few mutual funds with a good track record, if you feel that MFs are a good choice.

K. R. Gokuldoss

Your risk profile, need for liquidity and tax status are the key factors that can help you decide whether you should switch from the PPF into mutual fund investments. Given your age profile and the fact that you have preferred safe investment avenues so far, we would suggest you switch only part of your investments into mutual funds. The PPF offers an 8 per cent tax-free return on an assured basis. Mutual funds offer better liquidity, but the returns tend to be market-related and therefore, less predictable than the PPF.

The mutual fund options available to you are:

Short term debt/income funds: These open ended funds invest only in short term debt instruments and are likely to keep your capital safe, while offering you a return related to market interest rates. Liquidity is high, as you can withdraw your investments at the time of your choice. Under current market conditions, such funds may offer a 7-8 per cent annual return before taxes.

If held for over a year, your capital appreciation on these funds will be taxed at the long-term capital gains rate of 10 per cent (without indexation) and 20 per cent (with indexation).

Fixed maturity plans (FMPs): Closed-end debt funds are launched from time to time by fund houses with lock-in periods ranging from 1 - 5 years. You need to watch out for and invest in such schemes when they are launched. Liquidity will still be better than the PPF. FMPs provide returns that are in line with interest rates in the market at the time of their launch and the fund house will usually provide you with a indicative yield at the time of investment. Currently, 1-3 year FMPs offer a return of 7-7.5 per cent, after taxes.

Diversified equity funds: Diversified equity funds invest in stocks from a variety of sectors. While they have the potential to deliver a 12-15 per cent return if held for five years (and have delivered much more in the past), these returns are not carved in stone. As a retired individual, you should probably take note of the fact that you could lose part of your capital in an equity fund if the stock markets decline or halt their sustained bull run.

Among the diversified equity funds, we usually recommend funds such as Franklin India Bluechip Fund, HDFC Top 200 Fund and Magnum Contra Fund to first-time investors because of their consistent long-term track record. Open-end equity funds, which we believe are the best options, offer high liquidity and you can withdraw your money at any time.

On whether you should switch your investments from the PPF to mutual funds, we have the following suggestions:

If you would like to have liquidity, you could switch some of your money from PPF into debt mutual funds. You could also consider FMPs if you would like a predictable return, with a 1-3 year lock in period. Neither of the options may materially improve your returns, for now. But making the switch may help you rejig your investments one or two years down the line, to benefit from rising interest rates.

If you would like to significantly improve the return potential of your portfolio, and are willing to assume additional risk, you could consider adding the diversified equity funds mentioned above. We suggest you take the systematic route to investing in these funds (this allows you to invest through monthly instalments).

To reduce the risk to your capital from stock market gyrations, we would suggest you restrict your equity allocations to 20-25 per cent of your savings. Opting for dividends rather than growth, in these funds would enable you to earn your returns in a regular and tax-efficient manner.