Fund Talk

I have the following mutual fund investments through SIPs taken for three years from date of investment: Rs 3,000 per month each in Reliance Vision (from October 2010), Sundaram Select Midcap (September 2010), DSPBR Top 100 (November 2010), Fidelity Special Situations (December 2010) and Rs 1,000 in Reliance Growth from August 2010.

I also have the following investments that are not currently under SIP: Reliance Vision purchased under SIP with total investment at Rs 46,000; Rs 15,000 in Magnum Contra bought at Rs 25 NAV about seven years ago. Magnum Global for Rs 15,000 purchased at Rs 25 per unit seven years ago. When should I encash these investments? The SIP should have at least 30 per cent growth after three years, when the proceeds will be required for an engineering college admission in June 2013. Please comment on the above investments and suggest any changes required for better results.

Murali

Your portfolio will need some re-jig but, before we discuss that, let's get down to some brass tacks. One, saving for child's education would require planning/saving over a period of at least 7-10 years based on the kind of high school education your child might want to pursue and the amount of surplus you can invest for the purpose. Hence, the current savings rate and the time line of two years are inadequate, in our opinion.

We however, hope that you do have other means of finance or alternative savings avenue to make up for any shortfall to fund the initial costs and four years of engineering education. In future, put an end-figure to your goal and up your savings to suit the final capital you would need. For example, say you decide you need sum of say Rs 15 lakh in five years and assume your investment can earn at least 18 per cent per annum compounded annually. In this case, you would need to save about Rs 16,000 per month for five years in investments that would yield the above return. You can simply calculate this using the financial functions in an excel sheet or any online calculator.

Two, we are not sure if you are talking about a 30 per cent compounded annual return or a 30 per cent appreciation of your capital. While a compounded annul return of 30 per cent in two years would be a tall order, a capital gain of 30 per cent (translating in to about 14 per cent per annum) may be possible, provided markets do not face yet another downturn such as the one in 2008.

In short, plan for your goals well in advance and save based on the final sum you would require, preferably aligned to a goal.

Higher risk

Moving to your portfolio, we would have to choose a few aggressive funds to pep up returns. But do note that this will also up the risk profile.

We suggest you exit Reliance Vision as well as Reliance Growth and instead use the proceeds to start an SIP in HDFC Equity, given the sagging performance of the two Reliance funds. You cannot wait too long for these funds to catch up; you may be better off with a consistently superior performer such as HDFC Equity. Switch from Fidelity India Special Situations to Fidelity Equity. Continue SIPs in DSP BR Top-100 and Sundaram Select Midcap. While your current SIP running to Rs 13,000 per month can continue on the funds recommended above, you can invest the sale proceeds (from the exit options we mentioned) using a systematic transfer plan from a short-term debt fund in the respective fund house; short term interest rates now being attractive.

Exit all the lumpsum holdings — Reliance Vision, Magnum Contra and Magnum Global. You have made good returns of 27-28 per cent annually over the last seven years in the Magnum funds. However, given their lack-lustre performance now, consider exiting them. Proceeds from these three funds can be used to start SIPs for over a period of one year in HDFC Midcap Opportunities and UTI Dividend Yield.

After a year, adopt a hold strategy. You can consider selling the funds in small tranches, either six months before your requirement or when there is any exceptional market rally even earlier. While we would ideally like to restrict the total number of funds you hold to about five, given the short time-frame and the return expectation, we would like to diversify your bets to combat risk. Please note that, until recently, a number of funds were sporting negative returns over two- and three-year periods. Such a risk is present in your portfolio as well, if the market declines. If this portfolio manages a 15 per cent annual return, it may fetch you about Rs 6.7 lakh (we could not calculate the gains so far from the Rs 46000 Reliance Vision fund given lack of information on holding period).

Our suggestion is that you watch markets closely for exceptional rallies of say 30 per cent or more and book profits then. Also consider locking any surplus into good deposit rates over a two-year period with banks or top-rated instruments of corporates.

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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