The Hindu Business Line : Fund Talk

I am a retired professional around 65 years of age. After reading your columns, I have started investing in mutual funds in the last two-three years. I do not look to returns from these funds to meet my living expenses. Hence, all my invest ments are in the growth or dividend reinvestment options. My objectives are to protect capital and earn 15-20 per cent yearly tax-free returns over a period of five years. I have an average risk appetite but no problem with interim volatility.

I have so far made lumpsum investments in HDFC Equity, HSBC Equity, HDFC Tax Saver, DSPML Opportunities, Franklin Flexicap, HDFC Core and Satellite, Reliance Equity, HSBC Midcap, Franklin Blue chip and Tata Infrastructure Fund.

I also have SIPs in HDFC Equity, HDFC Prudence, DSPML Balanced, HDFC Top 200, FT Prima Plus, DSPML T.I.G.E.R and Sundram Select Midcap. Our ELSS contribution is entirely in HDFC Tax saver thru SIP. Kindly advise whether my mutual fund inves tments need any change? After 2009, I would need a secure income of Rs 25,000 per month. Should I invest in a Monthly Income Plan or debt fund? I will invest this money on maturity of my other securities.

Ram

Normally, we would not recommend a portfolio comprised only of equity funds to an investor who is retired and does not have a regular income stream. However, as you mention that you do not look to the returns from this portfolio for your regular living expenses, we presume you have invested only your surplus savings in the above funds.

However, given the sustained appreciation in stock prices over the past three years and the stellar returns that equity funds have managed, the probability of a sharp stock market meltdown eroding the value of your portfolio, has certainly increased from three years ago. Thus, we do believe it may make sense for an investor such as yourself to book profits on some of your holdings and shift to safer avenues now. You could rejig your fund portfolio through the following means:

Re-evaluate the current value of your portfolio in light of your original return expectations. Several of the funds you own have already appreciated much more than 20 per cent per annum over the past three years. As a result, you may h ave already achieved the total portfolio value you were originally targeting at the end of five years.

If so, we would suggest booking profits on part of that portfolio and switching to safer avenues to protect your principal from any erosion linked to equity market volatility. Fixed deposits for up to a year, Fixed Maturity Plans from mutual funds and short-term deposits with banks may be options to consider.

What proportion of your fund portfolio should you switch? That will depend on your holding period from here and ability to handle losses. If you want to completely insulate your capital, make sure that not more than 15 per cent of your portfolio is in equity funds from this point and the rest is switched into safer investment avenues. You may also have to move to safer avenues if your residual holding period is less than five years.

The fund choices you have made for your portfolio are quite good and appear to be based on the funds’ long term track record.

However, to streamline your portfolio and reduce its overall risk profile, we would recommend you redeem units in funds such as Tata Infrastructure, HSBC Midcap and Reliance Equity, given their higher than average risk profile. We would also advise profit-booking and refraining from further investments in funds such as DSPML T.I.G.E.R and Sundaram Select Midcap for the same reasons.

We would not advise either Monthly Income Plans or debt funds, at this juncture, if you are targeting a fixed and regular income stream. Monthly Income Plans do carry some risk on account of their marginal equity exposure. On the other hand, the NAVs of debt funds are subject to fluctuations based on interest rate movements.

Options such as fixed deposits with a monthly income option and the Post Office Senior Citizens’ Scheme or Monthly Income Scheme may be best suited to this objective. However, you could maintain some allocation in your debt portfolio to liquid funds and short-term debt funds in order to have liquidity at a time of your choice.

Aarati Krishnan

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

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