I am a 63-year old senior citizen and have been investing in mutual funds since 2001. To avoid long-term capital gains under the Direct Taxes Code regime post 2011-12, I have decided to sell all the schemes and start new SIPs from April onwards. I have selected Benchmark S&P CNX 500, Birla Frontline Equity, DSPBR Equity, DSPBR Top100, Fidelity Equity, Fidelity India Value, HDFC Balanced & Prudence, ICICI Pru Focused Bluechip and IDFC Premier Equity. I have taken care of my old-age medical expenses. Hence, I do not depend on mutual fund investments and can continue SIPs for the next 5-7 years. I would like to have your suggestions on this.
Long-term capital gains will not be taxed under the proposed Bill on the Direct Taxes Code, which was redrafted in August 2010. The proposal stated that 100 per cent of the long term gain on equities and equity mutual funds would be allowed as deduction. In the case of short-term capital gains (less than a year), 50 per cent of such gain would be taxed in the slab in which your income falls for tax purpose. The code will be applicable from the financial year beginning April 2012.
The original proposal of taxing long-term gains (which, we suppose, you are referring to) was removed. Hence, do not be in a hurry to sell all your holdings for tax purposes, especially if they funds hold a good long-term track record. You may, at best, weed out the underperformers as well as book some profits, considering your age and given that you have been a long-term investor. As we do not have details about your existing funds, we are unable to comment on them.
If you wish to reinvest the profits booked or money received from redemption of underperformers, you may choose a combination of equity and debt-oriented options. While you may not be in immediate need of money, we would recommend that you have a balanced approach post-retirement as loss of capital remains a risk in equities as an asset class.
If you do not already hold debt funds we would like to make a few suggestions. Of the funds that you have mentioned, HDFC Prudence is a good choice in the balanced fund category. It has a better long-term track record than HDFC Balanced. It would suffice that you hold the former alone.
You can also consider adding HDFC MIP Long Term and Canara Robeco MIP. These funds predominantly invest in debt, with some exposure to equity to add pep to your portfolio. These, together with a combination of fixed deposits from banks and corporate deposits as well as debentures and bonds from corporate houses with a good credit standing, you should be able to manage inflation-beating returns over a 3-5 year period.
Given the recent spate of hike in interest rates on deposits, this may be a good time for you to lock in to fixed deposits.
Your equity exposure can ideally be restricted to 40 per cent of your total allocation and can go up to 50 per cent if you have sufficient surplus and also have to the time to track equity performance.
HDFC Equity, Quantum Long Term Equity and UTI Dividend Yield may be good choices for a retired person. HDFC Equity and Quantum Long Term equity would provide you with a good dose of large-caps with limited mid-cap exposure. You can do away with the other funds (which are also delivered good performance) you mentioned – DSP BR Top 100, DSP BR Equity, and Fidelity Equity if you hold first-two mentioned funds.
Birla Sun Life Front Line Equity is also a large-cap fund but has seen some slippage in performance. Fresh exposure can be avoided now. ICICI Pru Focussed Bluechip and Fidelity India Value have been performing well in the last year but have a limited track record of less than three years. It may be better to observe long-term performance before buying these funds.
You can invest in S&P CNX 500 provided you take limited exposure and invest in a phased manner. Note that this index represents over 90 per cent of the total market capitalisation, which means it has a liberal dose of mid-caps. This would subject it to sharp gyrations during volatile markets. In 2008 for instance, the index declined 57 per cent even as funds such as Quantum Long Term Equity contained the fall to 47 per cent. Ideally, if you are an avid tracker of the equity market, index funds or ETFs are best bought during market dips of, say, at least 5-10 per cent.