Mutual Funds

Fund Talk: It is wrong to assume SIPs protect principal

AARATI KRISHNAN | Updated on October 13, 2012 Published on October 13, 2012

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SIPs only ensure that too much of your money is not invested into stocks at one go.

I’m 29 years old and have just started investing in mutual funds. Currently, I’m investing Rs 5,000 monthly in mutual funds — Rs 3,000 in Fidelity Tax Advantage Fund and Rs 2,000 in Fidelity Equity Fund through systematic investment plans (SIPs). I’m hoping to add another Rs 5,000 per month and have chosen HDFC Short Term Opportunities Fund and ICICI Pru Focussed Bluechip Fund. I would like to build a corpus of Rs 25 lakh in seven years. I’ll also need cash of around Rs 5 lakh in three years, and hence I’ve included debt fund in my portfolio.

My questions are:

In order to reach my goal of Rs 25 lakh, will the funds chosen help? And how much should I be investing monthly?

Is a debt fund a good instrument to invest in for a short-term goal of three years?

Does the SIP route safeguard my principal? Or is it false to believe that SIPs are always safe?

Please advise.

Thilak

The sum that you propose to invest — Rs 10,000 per month — may not be sufficient to get you to a corpus of Rs 25 lakh in just seven years. Calculations show that to meet that target, you will either have to increase your savings by Rs 7,000 a month or keep investing for a longer period for it to bear fruit. It may take 9.5 years instead of 7.

Assuming you can only invest Rs 10,000 in equity funds through the systematic investment plan (SIP) route, you may be left with about Rs 15 lakh at the end of seven years. That is assuming a 15 per cent annualised return on equity funds.

Good equity funds may, of course, deliver more than that, but in order to be conservative, it is better to set your equity return expectations at no more than 15 per cent. If your targets are met ahead of time, you can in any case sell your funds and re-deploy your money in safe instruments.

As to your choice of funds, we would not advise you to invest so much of your savings in just one fund house, particularly Fidelity. As you may know, Fidelity Investments recently sold its mutual fund arm to L&T Mutual Fund. Therefore, Fidelity’s equity funds are currently undergoing a transition in ownership. A change in the fund’s managers or style over the next two-three years cannot be ruled out.

We suggest you divide equity fund investments into four equal parts and sign up for SIPs in four funds — HDFC Top 200 Fund, Quantum Equity Fund, ICICI Pru Discovery Fund and Goldman Sachs CNX 500 Fund. The last fund is to ensure a passive component to your portfolio, which can also benefit from the higher returns of mid-cap stocks. ICICI Focussed Bluechip, though a good fund, is a purely large cap fund, which may not deliver the high returns you seek.

On your second question, you are quite right. For an investment horizon of three years, it is best that you don’t invest in an equity fund as a complete market cycle takes much longer to play out. However, given that interest rates have just begun their downward trajectory, it may make sense to lock into a three-year Fixed Maturity Plan or a corporate deposit with a high credit rating. Medium term income funds also make sense for this horizon.

Finally, you are wrong to assume that SIPs can protect your principal. SIP routed investments can suffer losses too, if the markets are in a sustained downtrend.

In an equity investment, no matter what route you take, you can never be assured of principal protection. SIPs only ensure that too much of your money is not invested into stocks at one go. By phasing out your investments, you get equity exposure at different market levels, whether in a falling or a rising market. Therefore SIPs reduce losses better compared to lumpsum investments, but they don’t completely prevent them.

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I am 36. I have been investing Rs 2,000 every month in DSP BlackRock Top 100 and Birla Sun Life Frontline Equity and Rs 3,000 in Reliance Equity Opportunities Fund and ICICI Prudential Discovery. I have been making investments since June 2012. I have also been depositing Rs 8,000/month in the Public Provident Fund. I can invest another Rs 2,000 a month. My target is to have a corpus of about Rs 1 crore after 15 years. I have a moderate risk appetite.

Kindly tell me if I should continue with this portfolio or change my allocation.

Rajashekhar

To sum up, you are investing Rs 10,000 per month in equity funds, Rs 8,000 per month in PPF and can add another Rs 2,000 per month.

Now, investing Rs 10,000 in equity funds earning a 15 per cent annualised return will fetch you a sum of Rs 67 lakh after 15 years. Your investments in PPF, if they earn a conservative return of 7 per cent per annum (given that PPF rates are now linked to the government bond markets), will give you Rs 25.3 lakh at the end of 15 years.

We would suggest parking the Rs 2,000 that you can spare in gold exchange traded funds, just as an insurance against equity volatility. Though gold has easily managed a double-digit return in the past five years, we don’t think this can continue indefinitely. Factoring in a 7 per cent annual return from gold, matching inflation, this portfolio can yield Rs 6.3 lakh. In all, these investments can get you to roughly Rs 99 lakh in 15 years’ time.

We see that you have selected your funds based on our past recommendations. Don’t forget to review your portfolio from time to time to replace funds if they slip up in performance.





Published on October 13, 2012
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