Mutual Funds

Fund Talk

VIDYA BALA | Updated on September 17, 2011


Do not tolerate the sustained underperformance of any fund against its benchmark and peers.

My father started SIPs in the following funds from February 2009: HDFC Top 200, HDFC Prudence, Magnum Multiplier Plus and Magnum Taxgain Scheme – Rs 1,000 per month in each fund under dividend option. He has also invested a similar amount in Magnum Balanced and Kotak Gold Fund (April 2011) under growth option. He has now entrusted me with the task of continuing these SIPs. Hence I would like an assessment of these funds. Is it advisable to continue these SIPs? If not, please suggest necessary changes. I can continue the SIPs for the next 10 years. I am 28 years old.

In addition to the above SIPs, I have direct equity investments in two blue-chip stocks worth Rs 2 lakh. Could you please give the tentative amount I shall be able to receive at the end of another 10 years? I wish to have a corpus of Rs 1 crore towards the end of 2020 exclusively from mutual funds and direct equities. If I am unable to achieve this target, what are the changes you would advise? If necessary, I can enhance the SIPs.

J.M.A. Alex

We will first examine your goal of having Rs 1 crore by end 2020, as the investment target and time-frame is one of the determining factors in the choice of funds. You have Rs 2 lakh in hand now in direct equities and SIPs of Rs 6,000 per month. After the modification in funds (to improve performance) we are about to suggest, the existing investments together with similar sums of SIPs deployed over the next nine years would fetch you Rs 25 lakh.

For this purpose we assumed a return of 15-16 per cent in your equity funds, 8 per cent annual return in gold (we cannot presume that the current stellar performance of gold will repeat itself and, hence, assumed debt returns for gold) and a 12 per cent annual return on the two large-cap stocks you hold.

Higher savings

You can see that the above amount is a long way off from the Rs 1-crore target you wish to achieve. To reach Rs 1 crore after nine years, you will need total equity SIPs (other than gold) of Rs 34,000 per month if the funds can return an aggressive 18 per cent annually or Rs 38,000 per month if the portfolio earns 16 per cent. This together with gold (at 8 per cent return for SIPs of Rs 3,000 per month) and current stock investments will fetch you the target. Returns may turn out to be higher but it is better to hold to conservative estimates and shift the gains to safer avenues if you attain your goal early.

Portfolio rejig

Moving to your portfolio, it has two outstanding funds HDFC Top 200 and HDFC Prudence that are well-tested over time. Continue these SIPs. However, the other three Magnum funds are all either underperforming or struggling to beat their respective category average performances. To give an example, your balanced fund HDFC Prudence will have returned 16.5 per cent annually since the start of the SIPs, as against a poor 1.3 per cent by per Magnum balanced. Over-exposure to schemes from a single fund-house is not also advisable; this sometimes happens when your bank (which sells the group asset management company's schemes) doubles as your mutual fund agent.

We suggest you exit all three Magnum funds. Instead, you can add IDFC Premier Equity, ICICI Pru Discovery and UTI Opportunities. We are suggesting two mid-cap funds and a diversified fund to up your risk-return profile. If you intend to increase your SIPs, you can also add Reliance Banking. The banking fund, despite being a theme fund, is a good way to prop portfolio returns as the performance of banks is linked to that of the broad economy.

Given your age and longer investment time-frame, you should be able to take the volatility that these funds may experience in the short term. Of the total amount you set aside for SIPs every month, not over 10 per cent may be invested in gold fund (as a diversifier), 20 per cent each in HDFC Top 200 and HDFC Prudence, 15 per cent each in the two mid-cap funds and 10 per cent each in UTI Opportunities and Reliance Banking. Increase your exposure to the two HDFC funds if you are not investing in Reliance Banking.

Go for growth options in all the funds. Sale proceeds from the Magnum funds can be deployed in short-term debt funds (in the respective fund houses where you will be running the new equity SIPs) and shifted to equities using Systematic Transfer Plan (STP).

Review performance of funds every year in relation to benchmark and peers. Do not tolerate significant underperformance (5 percentage points or more) of fund vis-à-vis its benchmark over a 1-2 year period. Similarly, even if you hold only two blue-chip stocks, ensure that you track their financial and business performance and keenly observe markets and average or book profit in these stocks as and when warranted. If not, you can take exposure to key indices through Nifty ETFs or Junior Nifty (for emerging large-caps).

(Queries may be e-mailed to >, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.)

Published on September 17, 2011

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