The Hindu Business Line : Fund Talk

I am a 44-year-old NRI living in the Gulf for the past 10 years. I want to begin investing in mutual funds through the SIP route. I have the following funds in mind: Franklin India Bluechip, Reliance Vision, HDFC Top 200, HDFC Equity, Franklin India Opportunities, Templeton India Growth Fund and HDFC Prudence. Kindly advise whether I should opt for growth or dividends. I have a 5-year investment horizon and within this period, I have to see my two children's through their higher education and save towards retirement. I plan to invest Rs 2,500 to 3,000 in each fund per month.

Prakash

Setting aside about Rs 24,000 per month (since you have suggested Rs 3,000 each in eight funds) towards systematic investments in equity funds would leave you with about Rs 20 lakh at the end of a five-year period. This is assuming that your equity investments grow at a compounded rate of 15 per cent annually. You would, of course, be the best judge of whether Rs 20 lakh will be sufficient to meet your children's education and then leave some surplus towards your retirement. If you feel the sum is inadequate, you will have to allocate a larger proportion of your income to the SIPs.

Coming to your choice of funds, we do observe that you have tried to restrict your choices to established diversified equity funds with a good track record. However, we have always held that holding more than 3-4 equity funds in your portfolio is not advisable. Equity investments require careful monitoring and we would suggest that you review your portfolio of funds on a quarterly basis to identify and replace under-performers.

If you would like to do this, holding 3-4 funds may make your job of tracking performance much easier. As a diversified equity fund usually invests in at least 30-40 stocks, you will be able to obtain a fairly large portfolio of stocks, with representation from different sectors, just by owning four diversified equity funds.

Hence, we suggest you make larger allocations to each fund but restrict the number of equity funds you hold to four. We think that a mix of HDFC Equity Fund, Franklin India Bluechip, Reliance Vision and HDFC Top 200 will make up a reasonable portfolio for a conservative investor. HDFC Prudence Fund as it is a hybrid fund, offers lower return potential than a pure equity fund and thus, may not be suited to your requirements.

Between growth and dividends, we would recommend you opt for the growth option of the equity funds we have suggested. Since you have an investment horizon of five years, you will in any case, be in a position to earn tax-free returns in the form of long term capital gains and do not need dividends.

As the growth option will plough back returns into the fund itself, your investments would be able to capture the full benefits of compounding and may take you faster towards your financial goals. In making the above recommendations, we are assuming that you do have a portion of your portfolio allocated to safe, fixed return avenues. Given the buoyancy in earnings growth, equity funds can be expected to deliver a 12-15 per cent annual return over a five-year holding period. But after the steady appreciation in stock prices over the past five years, investors have to be aware of a heightened risk of capital erosion, when they invest in equity funds.

Aarati Krishnan

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