FUND TALK

I am 41 years old with a take-home salary of Rs 85,000 a month. My monthly expenses are around Rs 50,000 and I have four dependents. I have insurance coverage of Rs 40 lakh and medical cover of Rs 2.5 lakh for all family members individually.

I stay in my own house and have no liabilities. I have a fixed deposit of Rs 3 lakh for emergency and am considering my PF account (monthly deposit of Rs10,000 per month from 2010 onwards) as investments in debt.

I have investments of Rs 3 lakh in stocks. I have SIPs in Franklin Bluechip, HDFC Top 200, Sundaram Select Midcap and HDFC Equity.

All my SIP investments are in the dividend option. I also have a one-time investment of Rs 36,000 in Reliance Growth done around September 2010.

Where should I invest the dividends received from the above funds? I want to invest the dividends in a safe instrument but would also like the returns to be tax-free.

Should I retain Reliance Growth? I can invest another Rs 5,000 in SIPs. I will need Rs 40 lakh six years from now and another Rs 50 lakh 11 years from now. I can think of retirement only after fulfilling the above.

So, with my current investment strategies, are my goals realistic? Do you think I need to add more to my investments? If so, how? Kindly consider me an aggressive investor.

Rakesh You will need to increase your monthly investments substantially to meet your goals at the end of six and 11 years, and also save some money towards retirement. A computation of the sums you have saved through equity mutual funds (SIPs and lump sum) shows that their value may be at roughly Rs 6.6 lakh at today's net asset values (assuming dividends were reinvested).

Your equity funds have witnessed only a 4 per cent appreciation in value. But don't lose heart, as you have been investing only for two years, in which period the markets have remained range-bound.

Save more

Taking into account your current portfolio, you can build the corpus you target in the following way:

To obtain Rs 40 lakh in six years' time you will need to save Rs 35,000 per month in equity or balanced fund SIPs. The SIPs you have mentioned total Rs 21,000 per month, leaving a shortfall of Rs 14,000 per month to meet this goal. This is assuming your funds generate a 15 per cent annualised return for six years.

To work towards your second goal of Rs 50 lakh in 11 years, we suggest you use your current stock and equity fund portfolio, while making additional investments too. At a 15 per cent assumed return per year, the Rs 6.6 lakh you have today in stocks and equity funds can grow to Rs 30 lakh in 11 years.

We have considered this portfolio towards this goal because it allows a longer holding period for your equity investments to pay off. That leaves you with a Rs 20-lakh gap. You can make this up by investing an additional Rs 6,000 per month in equity/balanced funds SIPs.

In total, therefore, you will need to invest another Rs 20,000 a month (and not just Rs 5,000) in SIPs to meet your two key goals.

It is good that you have tied up essentials such as an emergency fund, term insurance plan, medical plan and so on. The Rs 10,000 a month you contribute to your provident fund may add up to Rs 53 lakh by the time you turn 60. We are assuming a moderate return of 7 per cent a year on this debt-oriented investment. This sum will not be enough to see you through retirement.

We suggest that once you meet your first two financial goals, you do not reduce your SIP investments but continue to plough the amounts into a retirement corpus.

Fund choice

As to your choice of funds, your current portfolio has about 29 per cent invested in Franklin Bluechip, 31 per cent in HDFC Top 200, 16 per cent in Sundaram Midcap and 15 per cent in HDFC Equity.

Retain these funds and continue your SIPs. As to Reliance Growth, it has managed unimpressive returns in one- and three-year periods. A midcap fund such as IDFC Premier Equity may help deliver a boost to your portfolio returns. You could, therefore, switch to this fund.

Though your current crop of equity funds is quite good, you need to diversify across funds and houses as you are deploying such a large sum.

Plan your additional SIPs of Rs 20,000 a month by adding IDFC Premier equity and balanced funds such as HDFC Prudence and FT Dynamic PE ratio Fund. That will add a dose of debt to your portfolio and reduce risk too.

Given your ambitious goals and your assessment of yourself as an aggressive investor, you must invest in the growth options of equity and balanced funds. Without systematically reinvesting dividends, your portfolio will not be able to grow at the required rate.

And given that equities are the best vehicle to earn high returns, there is no point in opting for dividend payouts and then hunting around for good investment avenues elsewhere.

Remember, returns must always take priority over tax planning when it comes to long-term investing.

(The recommendations made in this column address the readers’ query, based on their risk profile and requirement. They may not be applicable to all investors.Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to Business Line, 859-860, Anna Salai,Chennai 600002.)

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