I am 59 and run my own business. I have surplus funds which are at present invested only in bank FDs at 9-10 per cent interest. As the returns from FDs are eaten away by tax and inflation, I have been thinking about diversifying into other avenues, but not directly into equity. My risk appetite is average and I expect my investments to earn around 15 per cent annually. My investment horizon is up to 10 years. Please suggest a strategy.

Kamal Laddha

You are right in observing that inflation and taxes eat into returns of fixed deposits. So, the price paid for safety seems to be pretty high. Again, you do not want to venture into equities directly. A mutual fund investing in a basket of stocks is expected to reduce risk and provide adequate diversification across sectors. Though not as much as direct equity, equity mutual funds too can be risky, as a manager is expected to take active calls in containing the downside and choosing a portfolio that participates well in rallies. Earning 15 per cent is possible over 10 years. But paradoxically, you cannot achieve such returns unless you invest in equity mutual funds, which may be risky given your age and average risk appetite. A more realistic target would be around 10 per cent over 10 years, something which is likely to be accomplished by investing in balanced funds, which entails taking lower risks.

Invest in Tata Balanced, Birla Sun Life 95 and ICICI Pru Balanced. If you can take above-average risks, large-cap funds such as Quantum Long Term Equity, ICICI Focused Bluechip and Franklin India Bluechip may offer reasonable alternatives.

Given that you run a business, we hope you have regular cash flows. If your inflows are volatile, stick to fixed income products such as FDs, FMPs, RDs and NSCs. You should ensure that you receive a regular income from your fixed deposits and only surplus amounts which you may not need should be exposed to market risks.

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I am 27 and working for a public sector undertaking. I have been investing in mutual funds through the SIP (systematic investment plan) mode for the past one year. I have parked Rs 2,000 apiece in IDFC Premier Equity, HDFC Equity, Franklin India Bluechip and SBI Emerging Businesses. Should I make any changes in my portfolio?

Albert

You have neither stated the goals for which you are saving nor your investment horizon. These two factors are important in deciding the right investment avenues for you.

In your portfolio you have two mid-cap funds. Since you have IDFC Premier Equity which is a quality fund with an excellent long-term track record, you can exit SBI Emerging Businesses though it has delivered well in recent years.

HDFC Equity is a proven performer over the long term, but has been a laggard over the last couple of years. You can stop further investments in the fund. Retain Franklin India Bluechip, but keep a tab on its performance. You can add a multi-cap fund in UTI Opportunities to your portfolio. Split Rs 8,000 as follows: Invest Rs 3,000 in UTI Opportunities and Rs 2,500 apiece in Franklin India Bluechip and IDFC Premier Equity. Review your portfolio annually and take corrective action by weeding out prolonged underperformers and rebalancing.

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I am 25 and work for a public sector bank. I get around Rs 32,000 per month. I am investing Rs 8,000 per month in a recurring deposit (RD). Also, I have been investing Rs 2,000 in HDFC Balanced Fund since June 2012 through the SIP route. I have managed to invest around Rs 50,000 in PPF annually over the past couple of years. This month, I started two SIPs of Rs 2,000 each in ICICI Pru Focused Bluechip and Quantum Long Term Equity. Are these risky choices, given my age? I am a beginner to the world of investing in mutual funds. I plan to buy a life insurance policy too. But I am confused about which policy to take. Are my present investments sufficient to help me get Rs 15-20 lakh in the next 10 years?

Avni Malhotra

By starting early on the path of investments, you have given yourself ample time to achieve all your goals. You have also, quite systematically, invested in PPF and RDs, which will take care of your debt investments. With the RD, together with your SIPs in HDFC Balanced, ICICI Pru Focused Bluechip and Quantum Long Term Equity, you should be able to accumulate Rs 20 lakh comfortably. The PPF is a 15-year product and can be earmarked for a specific long-term goal. The funds that you have chosen have a proven track record and can be retained.

Given your age, you can consider putting in more money in mutual funds than in RDs. You can consider reducing the RD amount to Rs 5,000 every month. So, you can split Rs 3,000 equally among the three funds mentioned above. Keep reviewing your fund periodically so that corrective actions can be taken as and when necessary.

Coming to the second part of your query, you must take a life insurance policy. Take a term cover alone for Rs 1 crore, which will cost you less given your age and will cover all risks. Do not take endowment policies or unit-linked plans, as these are expensive products. Besides, they do not provide adequate insurance nor are they high-yielding investments.

(Queries may be e-mailed to >mf@thehindu.co.in )

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