Mutual Funds

Fund Talk

Vidya Bala | Updated on November 19, 2011

I am 45 years old and have a son who is studying in class seven. I want to have a corpus of Rs 50 lakh in all, for my son's higher studies (engineering) and for my post-retirement needs.

I have been investing over the last six months in the following funds through monthly SIPs of Rs 1,000 each: HDFC Equity, HDFC Top 200, DSPBR Top 100 and HDFC Prudence. I also invest in gold BeES at one gram a month. I now have Rs 64,000 received from maturity of NSC. I want to invest this in funds.

Will the funds I hold cater to my need? Is any rejig required and should I invest more for the corpus? I also wish to know why the fund value differs across ETFs (Kotak, UTI, HDFC and so on). Is it because of the fund expenses? Please explain.

Subramanian O.A

It is nice to note that you have set yourself clear investment goals. However, before we proceed, a small caution on your assessment of retirement corpus. We suggest you consult a qualified financial advisor on how much you will need post retirement. People often underestimate the corpus required. Make an objective assessment taking into account the price rise we face in essential commodities (inflation) as well as medical requirements.

For now, we assume that you will have to shell out Rs 7.3 lakh for your son's engineering, considering a possible inflation of 8 per cent per annum. Instead of investing your NSC money in the current choppy market, we suggest you take advantage of the current high interest rates and invest in fixed deposits. Consider investing this sum in any cumulative five-year tax saving bank deposit with interest of 9.25-10 per cent. This will yield a lakh on maturity.

You currently invest Rs 4,000 a month in equity funds. Increase this by Rs 400 a month (in HDFC Equity) and keep your monthly gold investment at Rs 2,500. Gold prices keep fluctuating. When you build a corpus, it is better to keep a fixed monthly investment rather than fixing the units of ETF to be bought. The fixed deposit sum together with Rs 4,400 a month in SIPs over the next five years, Rs 2,500 in gold BeEs, and fund investments already made should help build the Rs 7.3-lakh corpus. But this is possible only if your mutual funds deliver at least 14 per cent per annum and gold a more conservative 9 per cent annually. We assume you are a conservative investor, going by the choice of funds. However, we would suggest that you make a switch from DSPBR Top 100 to DSPBR Equity as you already have a large-cap fund in HDFC Top 200.

Retirement corpus

Moving to your retirement corpus, we assume you will need about Rs 43 lakh after deducting the education expense from the total corpus indicated by you. If you start investing right away, you will need Rs 6,500 a month for the next 15 years, assuming the equity funds fetch an annualised return of 15 per cent.

If you cannot spare the above sum now, you can consider starting off with Rs 3,000 a month now and then increase it by Rs 8,200, five years from now. By then, you would have built your son's corpus and can divert the savings for your retirement kitty. If you are wondering why the later amount mentioned by us is significantly higher than the initial Rs 6,500 suggested, remember, investments made early fetch higher returns. You lose out by not investing more in the initial years.

For your retirement corpus, we suggest you invest in HDFC Equity, IDFC Premier Equity, Quantum Long Term Equity and HDFC Prudence, in equal proportions.

Gold ETFs

Each unit of gold ETF is roughly equal to a gram of gold, barring ETFs like the one from Quantum Mutual (where a unit equals half a gram). Fund NAVs differ with gold ETFs both on account of the expenses involved and the quantum of debt and cash that they are allowed to hold. Expense ratio of Birla Sun Life Gold ETF, a relatively new ETF with a small asset base is higher than, say, a Kotak Gold ETF, which has a larger asset base to absorb the costs. Cost of one unit will, therefore, be lower for the latter.

Also, it is important for you to know that the NAV of an ETF is not the same as the price at which it trades in the stock exchanges. The prices in the market are determined by the demand and supply for that ETF and also creation of fresh units by institutional investors. Therefore, the market price is either higher than the NAV or sometimes at a discount.

As a retail investor, do not look for arbitrage opportunities. Choose an ETF such as Gold BeES where volumes are high and the difference between the NAV and market price is minimum.

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

Published on November 19, 2011

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