The Hindu Business Line : Fund Talk

You should invest in two or three carefully selected diversified equity funds to begin with; as this will make your portfolio easy to manage and monitor.

I am a 61-year old retired person. I want to invest Rs 4 lakh in mutual funds with a five-year horizon. I understand the risks of investment in equity-oriented mutual funds fairly. I prefer to place myself in a ‘low-risk, above average return’ bracket. My only exposure to mutual funds or equity investments is through the annual investments I have made in HDFC Taxsaver and SBI Magnum Taxgain in the last 5 years. However, going forward I want to build a small portfolio in mutual funds with a core-satellite structure targeting dividends that might help towards monthly income and some capital growth. Please suggest if this would be a right time to invest in mutual funds? If yes, what funds you recommend me to begin with? And what should be my investment pattern/schedule? Also please advise me of the tax implications of the returns, especially for senior citizens.

Srinivasan

We suggest that you invest only a small portion (say, 10-15 per cent) of your portfolio in equity funds. For one, you state that you have a low appetite for risk and we aren’t sure about your ability to take losses on that portion of your portfolio which you would like to invest in equity funds.

Though holding equity investments over a five-year period will tend to reduce the volatility in returns to some extent, there can be no guarantees with equities. Diversified equity funds have had anywhere between 15 and 40 per cent shaved off their NAV in a matter of just two months from January and March 2008. This amply illustrates that investors in stocks, no matter what their holding period, have to be prepared for a bumpy ride. The promise of “above average” returns on equities, comes with “above average” risk.

Second, for the portion of your portfolio that you do decide to invest in equity funds, it may be prudent to keep a moderate return expectation of 12-15 per cent annually over a five-year period. We say this because equity funds have delivered manifold returns over the past five years on the back of a steadily rising stock market. Repeating this performance may be quite difficult if global market conditions remain adverse and concerns about a domestic slowdown materialise. But given the steep correction in prices, moderate returns of 12-15 per cent over a five year period may still be attainable.

Third, it may be best not to look to equity funds to give you monthly or even yearly dividends.

Given the tendency of stocks to move up and down sharply, dividend payouts of equity funds too tend to fluctuate. Funds will declare dividends in the years or periods when the stock markets perform well; they will be forced to skip them if a corrective phase sets in.

Finally, coming to your choice of funds, we feel that you should be investing in two-three carefully selected diversified equity funds to begin with; as this would make your portfolio easy to manage and monitor. We feel that funds with a large-cap orientation which have weathered earlier market cycles well, would be the best fit for your conservative profile.

DSPML Top 100 Fund, Birla Sun Life Frontline Equity and HDFC Top 200 are some funds we would recommend. Incidentally, tax saving funds may not be an ideal option for you, as such funds tend to be quite aggressive in their investment strategy and tend to take significant exposure to volatile mid-cap stocks. Take recourse to systematic investments through monthly instalments, rather than investing a large lump-sum at one go.

The tax treatment for equity funds is the same for senior citizens as for others. Gains on NAV, for investments held for more than one year in equity funds are exempt from tax, as they are treated as long term capital gains. The dividends declared by such funds are also tax-free in your hands.

AARATI KRISHNAN

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

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