I am an active investor in the direct equity markets. I started investing in tax-saving funds with the purpose of saving tax. But I started investing in other schemes to diversify and also to create a corpus. Presently I have SIPs of Rs 1,000 in HDFC Equity (dividend payout) started in December 2010 for two years, Rs 500 each in SBI Emerging Businesses — growth and UTI Opportunities — growth, both started in January 2012, for one year each.
Of the above, I am disappointed with the performance of HDFC Equity and am thinking of discontinuing it when the last SIP is over and shift the fund to some other performing fund or increase allocation to SBI Emerging Businesses which is doing well even in this dull market phase. Another option is switching HDFC Equity from dividend payout to growth option. I would like to know whether short-term capital gains will be applicable.
Apart from the above I have also invested Rs 21,000 in DSP BlackRock Tax Saver – dividend payout (lock-in ends March 2014), Rs 10,500 in Fidelity Tax Advantage - growth (March 2015) and Rs 16,000 in Franklin India Tax Shield – dividend (March 2013). Except DSP BlackRock Tax Saver, I have profits in the other two funds.
We would like to make a few observations on your strategy before moving to your portfolio. One, it is not a great idea to invest in mutual funds primarily for tax saving purpose. You have plenty of options outside equity-linked savings scheme for enjoying tax deduction. If you are employed, make good use of your employee’s provident fund and contribute more (called voluntary PF) if your organisation has such a provision. Then, there are the other small savings schemes of NSC and public provident fund, which also offer attractive rates this year. For a senior citizen, the post office senior citizens’ scheme as well as the five-year tax deposits with banks offer tax deduction and are attractive now.
Equity mutual funds can result in capital loss in the short to medium term. It may not be prudent to lose money for saving taxes. While ELSS can form a small part of your portfolio, it is better to exhaust fixed income options first, for tax saving.
Two, SIPs in mutual funds have to be done for a fairly long period of time to reap the benefits of rupee cost averaging. Yes, while you can stop SIPs and switch to other funds if a fund performance is poor, you should ideally have a minimum time frame of 3-5 years if you use the SIP route. And since you have stated that you are using mutual funds to build a corpus, more reason why you need to invest systematically for the long term.
Three, if your aim is to build a corpus and you can take the volatility inherent in equity funds, you should consider growth option instead of dividend payout. Dividend payout should be opted for if you want to book some profits occasionally or you need the cash flow. Otherwise, the dividend should be diligently reinvested.
Moving to your portfolio, HDFC Equity remains a sound fund with a good track record. Its current portfolio has higher weights for finance and energy stocks which have underperformed over the last one year. Besides, unlike earlier years, the fund’s portfolio is biased towards large-cap stocks. In 2012, a good number of mid-cap stocks witnessed sharp rallies while large caps did not participate with the same pace. This appears to be a key reason for HDFC Equity underperforming marginally in 2012 this far. SBI Magnum Emerging Businesses, laden with mid- and small-cap stocks, on the other hand, rallied well. Increasing your investments in SBI Magnum Emerging Businesses will only increase your risk profile as it is a mid-cap focussed fund.
We suggest you continue the SIPs in HDFC Equity for one more year, to complete at least three years. Your capital in HDFC Equity is down by 5.6 per cent currently. This is not too bad, considering that you would have had losses had you invested in the fund’s benchmark index — S&P CNX 500 — as well.
Switching to growth option
Yes, you can switch to the growth option. But you will suffer short-term capital gains tax if you switch units bought within a year from the dividend payout option to growth option within the same scheme. For instance, if you switch now, units bought from September 2011 will suffer short-term capital gains tax of 15 per cent (plus cess) if there are profits. But in your case, as the fund declared dividends twice since you started SIPs, your NAVs are lower. Hence, you are likely to have short-term capital loss. If you can set this off against any capital gain, switch all the units. Otherwise, stop SIPs under dividend payout option and switch units bought until August 2011 to the growth option. The rest can be moved after a year.
You can continue the other two equity funds. They have been performing well. While the tax-saving funds barring DSPBR Tax Saver have above-average performance, you can consider moving to better performing diversified equity funds after the lock-in . Use the sale proceeds to increase SIPs equally in existing funds and add Quantum Long Term Equity to your portfolio.
In mutual funds, SIPs must ideally be for 3-5 years for the investor to reap the benefits of rupee cost averaging.