Mutual Funds

Fund Talk - Don’t go overboard on tax saving vehicles

K. VENKATASUBRAMANIAN | Updated on November 21, 2017

Separate tax saving from investment decisions.

I am 29 years old and have been investing Rs 10,000 every month through the SIP mode in the following funds: Rs 3,000 in Quantum Long Term Equity, Rs 2,500 in HDFC Balanced, Rs 2,000 in IDFC Premier Equity, Rs 2,000 in Birla Sunlife Frontline Equity and Rs 500 in HDFC Gold Fund.

Further, I have invested in Canara Robeco Equity Tax Saver and Axis Long Term for Tax saving purpose.

My risk appetite is high and I intend to stay invested for a time horizon of 7-8 years to accumulate Rs 20 lakh. I want to increase the monthly investments to Rs 12,000. I am considering investing Rs 1,500 in Index ETFs (and also save tax under RGESS) and another Rs 500 in a US-based equity fund/ETF.

Would such a move be desirable or should I increase my SIP value in the funds that I currently hold? Please advise.

AshwinYou have chosen a very good set of funds to achieve your goal. Investing in Quantum Long Term Equity, Birla Sun Life Equity, IDFC Premier Equity and HDFC Balanced would give you exposure to a healthy blend of large- and mid-cap funds as well as a balanced scheme to provide stability.

But with your having stated that your risk appetite is high, the portfolio you hold is rather moderate in terms of risk profile. You can continue with this portfolio, though you can do some rebalancing.

You have stated that you can increase your investments by another Rs 2,000. Now, if you invest Rs 12,000 every month for a period of eight years and the returns generated are 13 per cent, you can comfortably reach your target corpus of Rs 20 lakh. The returns expectation is quite reasonable.

So rebalance your portfolio by investing Rs 12,000 as follows. Invest Rs 3,000 each in Quantum Long Term Equity, Birla Sun Life Equity and IDFC Premier Equity. Park Rs 2,000 in HDFC Balanced and Rs 1,000 in HDFC Gold or Reliance Gold Savings.

Review your portfolio periodically, say, once every year, to rebalance and weed out any underperformers.

Since you already hold a fairly balanced portfolio, you need not invest in an overseas ETF or fund. Here, you will need to factor in currency fluctuation too. Although the US markets are doing well, there is a healthy mix of schemes available domestically that can provide reasonable diversity.

There are also quality funds such as Templeton India Equity Income, that provide exposure to emerging markets and Birla Sun Life International Equity that has a mix of investments across developed markets. But given your moderate targets, sticking to domestic investments would suffice.

With regard to tax saving funds that you have, one would suffice for the purpose. Stick to the established Canara Robeco Equity Tax Saver. Also, do not go overboard on tax saving vehicles. You must separate tax saving from investment decisions and not generally combine the two.

If possible, add asset classes to your investment such as debt and real-estate, once your surplus increases.

*** I had been investing in the following schemes through the SIP route:

Reliance Regular Savings - Balanced Plan, HDFC Prudence Fund Dividend and HDFC Prudence Fund Growth.

I stopped SIPs in these funds a year ago. Now, I would like to restart SIPs in mutual funds. The investible surplus would be Rs 20,000 a month for another eight years.

Should I go with these funds or opt for new ones?

R.RamkumarYou have invested only in balanced funds so far. Also you chose to take both the growth and dividend options of HDFC Prudence. This may have been unnecessary. You should have opted either for the growth option or the dividend option.

Dividend option is taken only if you have a requirement for regular cash flows. Of course, fund houses need not declare dividends regularly and generally do so depending on market conditions and available surplus. Move both investments in HDFC Prudence to one specific option.

Now, you wish to invest Rs 20,000 every month for a period of eight years. Going by your risk appetite, it appears that you cannot digest too much volatility and choose to play it safe by investing in balanced funds.

You can build a portfolio of balanced funds by splitting the Rs 20,000 as follows: Invest Rs 5,000 each in HDFC Prudence, Birla Sun Life 95, Tata Balanced and ICICI Pru Balanced.

In case, you can stomach a little bit more volatility, you can replace one of the above funds with ICICI Pru Focussed Bluechip Equity or Quantum Long Term Equity to prop up returns. Carry on SIPs for the period you have mentioned as stopping them within one or two years is not likely to give you any meaningful capital appreciation.

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Published on May 18, 2013

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