The Hindu Business Line : Fund Talk

Risks cannot be mitigated when it comes to equities. But the impact of timing on investment returns can be reduced by phasing out mutual fund investments through the SIP route.

I’m 24 and have recently joined a leading company after finishing my Masters degree. I have a salary of about Rs 22,000 per month. I will be getting married in a years’ time or so. My wife and I will have a combined income of around Rs 50,000 a month. We plan to buy a house of our own, which may cost around Rs 30 lakhs. With this background, and the fact that I want a good sum saved by the time I am 50, can you please suggest how I should go about investing my money? I have absolutely zero knowledge about finances!

Govindraj

As you plan to buy a house quite soon, you will have to plan your savings in mutual funds based on the amount that you may have to shell out towards the monthly instalments (EMIs) you will be paying on the loan taken towards the house. Make sure that the EMIs do not take up too much of your combined earnings (30-40 per cent may be reasonable).

Though you are quite young and thus can invest a significant proportion of your savings in equity funds, do make sure you have enough cash to meet emergency and living expenses as well as a term insurance, before you embark on equity investments.

As a first-time investor in equities, we would suggest you make a start with plain vanilla diversified equity funds that have a good track record. Funds such as Franklin India Prima Plus, HDFC Equity, Magnum Multiplier Plus and Birla Frontline Equity appear to be good choices.

We suggest these funds because they have delivered consistent performance across various market phases in the past. However, you must be aware that the stock market has run up quite sharply over the past four years, during which time equity funds have registered a 3-5 fold appreciation in their NAVs. Therefore, any equity investments made at this juncture do carry some risks. Should stock prices fall or suffer a substantial correction, the NAVs of the equity funds you hold will also fall. That holds true even for the funds with a good track record, mentioned above. These risks cannot be mitigated when it comes to equities. But you can reduce the impact of timing on your investment returns by phasing out your mutual fund investments, through the SIP route (Systematic Investment Plan).

Since you have a fairly long investment horizon in mind, equity funds do remain suitable investments for you.

Given that your holding period extends beyond 10 years (if you hold until the age of 50), you have plenty of time to wait out any intermittent declines or corrective phases in the market, so that your investments can recoup their value.

Finally, it is always better to go about planning your investments with a specific target in mind. Arrive at a sum that you would like to have in your kitty by the time you are 50 and plan towards it, by back-working the investments you need to make.

Assume a 12-15 per cent return on your equity investments. Financial calculators available on most bank/financial Websites make this calculation quite an easy one.

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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