Don't confuse insurance with investments

I wish to invest in tax planning funds for my wife through the SIP (systematic investment plan) route. Which funds should I consider?

Prasad K.B. While it is a good move to save on tax by investing in equity-linked saving schemes, there is one point you need to know regarding the lock-in period. Each instalment made in a tax-saving mutual fund is locked in for a period of three years. Your wife can consider Franklin India Taxshield, ICICI Pru Tax Plan and Canara Robeco Equity Tax Saver. These funds have a proven track record of delivering above-average returns.

Apart from saving tax through funds, we hope you have also explored other debt options such as PPF, NSC and bank fixed deposits.

*** I am 27 years old and want to invest in a market-linked product. Currently, I invest Rs 1 lakh in PPF and another Rs 25,000 is paid as premium for insurance policies, every year. Apart from this, I wish to invest Rs 2,000-4,000 every month in the market so as to achieve higher returns. Please suggest some suitable avenues for me.

Saurabh Gaur Your decision to invest in a market-linked product is a welcome move. You can either invest in stocks directly or choose to put your money in equity mutual funds. The fund option would be a better choice, especially if you do not understand equity markets and cannot spend time to regularly monitor your investments.

Given your age, you must invest a good portion of your surplus in quality mutual funds for the long term to derive meaningful inflation-beating returns. Coming to your investments, you are investing Rs 1 lakh in PPF, which is a good debt option. But you are also investing Rs 25,000 in insurance policies, which is not so desirable.

If you are investing in endowment products, consider exiting them after the minimum lock-in or premium payment period is over. Endowment products generate low returns, are expensive and do not provide adequate cover. They are not ideal long-term investment vehicles.

Do not confuse insurance with investments. Take a term cover, which is cheap and also a medical insurance policy. After paying the premium for these two covers — term and health — the balance amount can be ploughed ino mutual fund investments.

On investing in equities, the assumption is that you can invest Rs 4,000 every month (after exiting the current insurance policy) in mutual funds. Invest Rs 2,000 each in Birla Sun Life Frontline Equity and UTI Opportunities. Remain invested in quality funds for a period of 7-10 years so as to generate higher returns. Of course, you must regularly review the performance of schemes in your portfolio.

You must also look to build a balanced portfolio over the long term with investments in debt, equity (through mutual funds), gold and real estate.

*** I have been investing Rs 1,000 every month in Canara Robeco Equity Diversified from June 2013. Is this a good fund? What returns does the scheme give for a five-year period?

Surender Raja You have chosen a quality fund in Canara Robeco Equity Diversified. It invests predominantly in large-cap stocks with some mid-cap names too thrown in to bolster fund returns. It has a track record of more than 10 years.

Coming to the second part of your question, no assurance can be given on the returns that a market-linked product can give. In the last five years, Canara Robeco Equity Diversified has delivered compounded annual returns of 22.2 per cent. But that is from the lows of 2008. So, there is no certainty that the fund will give such returns again in the future. However, it is a fund with a reliable track record and can be expected to deliver inflation-beating returns over the long term.

*** I am 25 and wish to invest Rs 2,000 every month through the SIP mode. I will increase the monthly SIP by 20 per cent every year. My investment horizon is 15 years. Please suggest two funds where I can park my money every month.

Nitin It is good to note that you wish to start investing so early into your career. What is more, you have also indicated that you can step up the investments by a healthy rate every year. Though increasing investments every year by 20 per cent may not be easy, it nonetheless represents a well-cultivated savings habit.

Since you are just starting on the investment path, it would be advisable to stick to stable large-cap funds. Invest equally in ICICI Pru Focused Bluechip and Quantum Long Term Equity. Given that your investment horizon is 15 years, you can also consider mid-cap funds if you can stomach risks. In that case, replace one of the above funds and park the amount in IDFC Premier Equity instead. As your surplus increases, you can consider more funds to be included in your portfolio.

Review the schemes that you hold once every year and carry out necessary corrective action. This may involve exiting prolonged underperformers and also rebalancing.

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