It may be prudent to raise the sum you require to fund your daughter’s wedding by gradually liquidating your mutual fund investments, especially in pure equity funds.

I am working and expect to retire in about 3-4 years from now. I am able to save about Rs 10,000 per month, apart from my section 80C savings. The savings in my provident fund, bank, post office, NBFCs and LIC total about Rs 25 lakh. I plan to conduct the marriage of my daughter in the next 2-3 years. I have made investments in mutual funds over the last eight years that have a value of Rs 11 lakh today. They are spread over several schemes:

Franklin Templeton: Bluechip Fund, Prima Fund, Prima Plus, Flexicap Fund, MIP and Pension Plan.

HDFC: Prudence, Equity Fund, Growth Fund, Tax saver, Top 200 and MIP Long Term.

SBI: Magnum COMMA Fund, Contra Fund, Magnum Global Fund, Emerging Business Fund.

UTI: Mastershare, Services Sector Fund, Retirement Benefit Plan.

Others: Sundaram Select Midcap, Kotak Balance Fund, ICICI Prudential Infrastructure Fund, Reliance Diversified Power Sector Fund. I would like to have your advice on how to prune the number of schemes and what strategy I should follow for my mutual fund investments from now on, as I have a monthly surplus of Rs 10000. At the present levels of the stock market indices, should I liquidate my investment in some of the schemes and hold onto cash, or continue to invest?

R. Ram

Our view is that you should begin to prune your investments in equity funds, especially as you would like to have a substantial portion of your savings in cash within the next two to three years. You could miss out on some further upside in equity market if you do this; but taking this call may still be worth it, as you could protect gains you have already made and achieve greater certainty about funding your daughter’s wedding as well as retirement needs, both of which are likely to crop up over the next two to four years.

Our suggestion would be that you retain your debt oriented investments, worth Rs 25 lakh, in insurance, post-office, banks towards funding your retirement needs, as many of these investments are capable of generating a steady stream of income. You can supplement this with some equity investments, so that your portfolio does manage to generate returns that can beat inflation as well as pure debt options over your retirement years. It may be prudent to raise the sum that you require to fund your daughter’s wedding by gradually liquidating your mutual fund investments, especially in pure equity funds. After a sharp and sustained rally in stock prices, many of your equity funds may have tripled or even risen fourfold in value over the past 3-4 years. While the stock market may continue to rise even from these levels, it is clear that the returns of the past three years certainly cannot be replicated.

On the other hand, if there is a correction in stock prices, brought on by a slowdown in either macro factors or liquidity flows, your portfolio may suffer an erosion in value. It is quite difficult to predict when and how long such a correction may last. As you require funds within the next 2-3 years for your daughter’s wedding, it may be best to protect the current value of your investments by redeeming some of your mutual fund investments.

As it may be prudent to liquidate the more risky investments first, we would suggest you book profits in Magnum Emerging Businesses, Magnum Global, Franklin Prima, HDFC Taxsaver, Magnum Comma, UTI Service Sector and Mastershare, Sundaram Select Midcap, ICICI Pru Infrastructure and Reliance Diversified Power. All of these are either theme based funds or mid-cap funds, which would be subject to greater volatility in a corrective phase than the other funds. Exit your investments in a phased manner so that you do not exit at just one level of the market.

For the surplus of Rs 10,000 that you mention, we would suggest you start SIPs in good balanced funds such as HDFC Prudence and DSP-ML Balanced Fund for now. As equity investments are still likely to deliver healthy returns over a 5-10 year period, you could consider adding a couple of pure equity funds at a later date, should a correction materialise.


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(This article was published in the Business Line print edition dated November 11, 2007)
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