I am 26 years old and work for a PSU bank. I want to invest in mutual funds through the SIP mode. My investment horizon is 10-20 years. Right now, I can invest Rs 3,000 a month through SIP as I have other liabilities. I can increase it to Rs 10,000 over the next five years. Kindly suggest two funds where I can make investments of Rs 2,000 and Rs 1,000, respectively.

Sidhartha Shankar Mishra

It is more important to get started on investing in equity funds early on in your career than to worry about the amount you can invest. Given that you can gradually increase the amount, you will be better placed to set long-term goals and achieve them.

Since you are just starting off, you can look to invest in a large-cap fund and a balanced scheme. As you become more comfortable with mutual fund investments, you can invest in more schemes, when your surplus increases.

Start with Quantum Long Term Equity and HDFC Balanced and park Rs 2,000 and Rs 1,000 in them, respectively. These funds have a proven track record of delivering top returns over the long term. If you can take more risk, replace HDFC Balanced with Reliance Equity Opportunities, a multi-cap fund that has delivered well over the past several years.

*** I have been investing in the following funds for the past three months – Rs 1,000 in HDFC Top 200 and Rs 1,500 in SBI Emerging Businesses. Please let me know if I should continue my investments in these funds.

Rajkumar

In general, you must review the performance of the schemes in your portfolio only once or at most twice a year. So, three months is too short a time to take stock of any fund’s performance. Having said that, due care must be taken before making fund choices.

HDFC Top 200 has an excellent long-term track record. But it has been underperforming for the past couple of years.

You can consider stopping further investments in the fund and start a SIP in Birla Sun Life Frontline Equity. Park Rs 1,500 in it.

SBI Emerging Businesses has not done as well compared with peers over the past one year. You can consider moving to ICICI Pru Discovery, a mid-cap scheme with a stronger track record and park Rs 1,000 in it.

*** I am 24 years old and work in a BPO. My monthly income is 10,000 and I can invest up to Rs 4,000 a month. Can I start with Reliance Equity Opportunities Fund? My investment horizon is 8-10 years.

Harsh

It is good to develop a habit of saving and investing early on, even though they may be small sums. This will bring in discipline and encourage you to save towards specific goals.

Coming to where to put your money in, given your age and investment horizon, you can afford to take risks and diversified equity funds are a fine fit. You have also made a good choice in Reliance Equity Opportunities. The fund adopts a multi-cap approach, roving for best buys across large-, mid- and small- cap stocks and boasts of a consistent track record across market cycles. You can go ahead with beginning systematic monthly investments in the fund.

If you do not wish to put all your eggs in one basket, you can diversify by splitting Rs 4,000 as Rs 2,000 in Reliance Equity Opportunities and another Rs 2,000 in ICICI Pru Focused Bluechip. The latter invests predominantly in large-caps and will complement the former very well. You will also benefit from the different investing styles of the two fund houses.

*** Between Franklin India Smaller Companies Fund and Franklin Prima, which one is better suited to get good returns after five years' investment?

Surendar Raja

Both funds broadly focus on mid- and small-cap stocks and have given a return of 23-24 per cent in the last five years. But there are one or two differentiating factors. Going by consistency in their ability to beat the benchmark, Franklin Prima is the better performer.

But Franklin Smaller Companies has been catching up over the last two years. In the 2012 mid-cap rally, the fund gained about 52 per cent, compared with Prima’s 44.7 per cent. Similarly, in 2013 too, though the CNX Midcap index shed 6 per cent, Franklin Smaller Companies gained a good 12 per cent. Franklin Prima could muster only half of that.

So going by recent performance, Franklin Smaller Companies seems better. But do keep in mind that past performance is no indication about the future.

Second, Franklin Prima tempers downside risk better by having a higher share of large-cap stocks, which are more stable, than the Smaller Companies fund. In the falling markets of 2011 and 2008, Franklin Prima contained losses better than Franklin Smaller Companies.

Ultimately, the choice is based on what risk-return proposition you are comfortable with. For a five-year investment horizon, you can invest in Franklin Smaller Companies. It is assumed that you have invested in other funds too and are not focused on these alone.

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