I am currently investing in the following funds with a four-year time frame to generate Rs 16-18 lakh to construct my house. I invest Rs 4,000 per month in the following funds: ICICI Pru Focussed Equity, IDFC Premier Equity, HDFC Balanced, ICICI Pru Discovery and HDFC Equity.
Please tell me if the allocations are correct or need a change. I can extend my time frame from four to six years, if need be.
However, a time frame of five years may be rather short for you to reap the full rewards of equity investments.
As a typical market cycle (boom to bust and back to boom) in India has lasted three years, you may not make a great return by remaining invested for five years. The fact that you are investing through the systematic investment plan (SIP) will further extend your payback period.
Given your limited holding period, we therefore suggest that you invest in balanced funds rather than pure equity funds. That will reduce the return potential of your portfolio, but will also contain the probability of capital losses due to equity market swings, as your investment period winds to a close.
While the funds you have listed out are pretty good choices for an equity investor, we suggest a rejig to reduce the risk profile of the portfolio.
In place of mid-cap funds such as IDFC Premier Equity and ICICI Pru Discovery, you can invest in balanced funds such as CanRobeco Balanced and DSP BlackRock Balanced Fund. IDFC Premier Equity is an excellent fund, but its midcap focus raises its risks and makes it unsuitable for limited holding periods. ICICI Pru Discovery similarly is a value fund in which you will have to stay invested for over five years to reap the full return potential.
Continue investing with HDFC Equity, ICICI Pru Focussed Bluechip and HDFC Balanced. Do monitor your portfolio at least twice a year to weed out underperformers. Don’t hesitate to encash your units immediately if your portfolio hits your Rs 18 lakh-target ahead of time.
*** I am a 28-year-old NRI, living in the US. I wish to make a one-time investment of Rs 5 lakh and SIP investments of Rs 25,000 a month in appropriate mutual funds in India. I would prefer medium risk funds. I would like to stay invested at least for three years, but would like to have liquidity to meet unexpected developments. Will you please help me choose the funds? I believe that all NRI investments in mutual funds are repatriable.
Nitin V. Indian mutual funds are allowed to offer products to NRIs on a repatriable basis subject to two conditions. One, the funds must be invested in Rupees through inward remittances via normal banking channels or transferred from the NRE/FCNR account of the non- resident investor.
Two, the dividend/interest and redemption proceeds may also be repatriated through the same route, after deduction of applicable taxes. Any open end fund will allow you the option to redeem units at the time of your choice. You can use this to redeem units in an emergency. However, do note that a five-year holding period may be essential to earn reasonably good returns from any equity or equity oriented fund.
We are not sure what you would perceive as medium risk. Based on your risk appetite, you have three options before you. The most risky one is balanced funds, which invest in a mix of equity and debt. These funds typically invest 60 per cent of their assets in equity and the rest in debt instruments.
Since equity markets tend to be quite volatile in India (tanking more than 50 per cent in select years, such as 2008), these funds can suffer sharp losses (of the order of 25-30 per cent in the worst case) in particularly bad phases.
However, their return potential is equally high, with the good balanced funds delivering 12-13 per cent per annum, even in the range-bound markets of the past five years. Here, HDFC Balanced, HDFC Prudence or CanRobeco Balance are good choices.
If you would like slightly lower risk, you can consider asset allocation funds. FT India Dynamic PE ratio Fund or FT’s Life Stage Funds are options. These funds direct your money into other equity or debt options either based on a fixed asset allocation plan or a dynamic one based on the market levels. Their five-year returns hover at 9-10 per cent per annum.
If you cannot stomach any capital losses and would like to stay away from equities, debt funds in India offer a good option too.
This is especially as their returns may be far superior to the returns generated by bond or money market funds in the US. Dynamic bond funds, which can switch between bonds of different maturities, may suit you well. Good ones such as IDFC Dynamic Bond and Birla Sun Life Dynamic Bond Fund have offered a 9-9.5 per cent return over five years.
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