The Hindu Business Line : Fund Talk

I am 33 and have been investing Rs 1,000 through SIP regularly for the last two years in Magnum Contra, Franklin India Flexi cap, DSPML Equity, Birla Midcap & DSPML T.I.G.E.R. I am planning to start new SIPs in Sundaram Select focus, Kotak opportunities, Reliance Banking and HDFC Top 200. Kindly review my decision as I am planning to invest for another 10-12 years. Also, should I continue the SIP in Birla Midcap?

Further, I wish to invest my money for a short period of time (1-3-6 months) in some liquid fund or FMP. What is the difference between liquid funds and FMP and which are the best liquid / FMP funds where I can park my money for short period in this current volatile situation? What will be the tax liability on these funds as I fall in 30 per cent tax bracket?

Chandan Kumar

You have done well to choose good funds and invest through the systematic investment route. Your core portfolio could, however, do with a few other funds with strong track record. You can, therefore, consider adding HSBC Equity and stop SIPs, if any, in Franklin India Flexicap. The former is likely to provide better stability to your portfolio in turbulent times such as the present one.

You can continue SIPs in Magnum Contra and DSPML Equity. If you are an astute investor you can consider adding units of these funds in small lots at every sharp market decline of, say, 5-10 per cent fall in the Sensex. This may help you to buy on ‘lows’, although these levels may not necessarily see the bottom. Otherwise, use the SIP route. You can continue to hold Birla Midcap if you have reasonable risk appetite and have a long-term investment horizon.

Of the other funds that you wish to invest into, Sundaram Select Focus and HDFC Top 200 are good choices in the current scenario. Avoid Kotak Opportunities for now. You can consider exposure once a clear market revival is visible. Reliance Banking is a theme fund and should be bought only if you have a higher risk appetite and are willing to track the sector.

The macro picture at present suggests that interest rates may be peak out in the near future, implying that credit might soon be available at less intimidating rates thus accelerating credit growth. Further, the recent cut in cash reserve ratio is also likely to infuse liquidity into the banking system. If these two events turn out to be as suggested, then the banking sector may see a revival. You can consider waiting for positive signals on these fronts before taking exposure to the sector.

Liquid funds and FMPs

Liquid funds are open-ended income funds that invest in fixed income debt instruments that have a short-term maturity. Such funds primarily serve the purpose of parking funds temporarily in avenues that fetch returns higher than the savings bank rate and at a risk lower that longer-term debt instruments. As they invest in short-term instruments the yields from liquid funds vary with the interest rates prevailing in the market. Hence, in a rallying interest rate scenario, liquid funds not only capture prevailing rates but also prevent any long-term locking of funds at lower rates.

FMPs are close-ended funds that mostly invest in debt (there are very few FMPs that also invest in equity), and have a pre-defined maturity ranging from 15 days to even 3 years. The fund’s maturity would coincide with the expiry of the instruments in which it invests. Hence FMPs lock into predetermined interest rates.

The offer document of an FMP would provide details of the instruments that are available for investment, the credit rating on such instruments and their indicative yields. The returns for neither liquid funds nor FMPS are guaranteed.

If you are looking to park funds temporarily for a few months you could consider liquid funds. Pru ICICI Liquid, HDFC Liquid or HDFC Cash Management may be decent options. Liquid funds are subject to capital gains tax like any other debt fund. Dividend option may be a more tax-efficient tool.

However, if are looking at debt as an investment option, you can consider FMPs of mutual funds or fixed deposits of banks with 10-11 per cent interest rate for a period of more than a year. As the current high rates on deposits are unlikely to be offered for long, this may be time for you to lock into good yields for a longer period.

You can check our ‘Update’ column for any new fund offers on FMPs. HDFC, IDFC and ICICI Pru have currently offered FMPs. Check the offer documents for indicative yields and the quality of instruments that these funds plan to invest in. The current yield on various instruments that FMPs can invest into varies from 8-11 per cent.

FMPs for over a year would be subject to long term capital gains tax (of 10 per cent without indexation or 20 per cent with indexation) whereas interest rate on fixed deposits would be taxed at the rates applicable for you under the tax slab. Since you fall under the 30 per cent bracket, FMPs may be more tax-efficient.

VIDYA BALA

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