Fund Talk

I am 53 years-old and recently invested in few MIPs mentioned below. My main concern is about the safety of my investments - where my principal is secure and I earn returns as much as or higher than fixed deposits. I believe that I don't have to pay any tax in MIP and dividends are tax free. I would like to know if my investment is safe and if they are performing well now and will do so in future. For how long I should keep these MIPs to get high returns and when should I exit from them? I have 40 per cent of investments in HDFC MIP Long Term Quarterly Dividend, 15 per cent in SBI MIP, 15 per cent in Reliance MIP and 15 per cent in HDFC Cash Management Fund (daily dividend for value). What options would you suggest if I wish to invest more? In case I wish to invest in some good and secure equity options what are your suggestions?

Faroukh

Since you seem to be very particular on the issue of safety, it is important for you to know that mutual funds are not the same as fixed deposits especially on the risk and return front. Banks offer a guarantee on the principal amount (term deposit and savings account put together) up to Rs 1,00,000. The interest rate you earn is also fixed. Mutual funds, on the other hand, do not offer any guarantee on the principal and cannot offer a fixed return because they are dynamically invested in varying debt/equity instruments. The risk though is normally compensated by superior returns.

Not risk-free

While liquid/ultra short-term funds are known to be reasonably safe (with returns in the range of 6-7 per cent in good times), MIPs are riskier as they invest as much as 20 per cent of in equities, which will be subject to stock market vagaries. Any decline in principal as a result of sharp downturns in the stock market or due to interest rate risk in the debt portfolio can cause declines.

As for taxability, yes, dividends from all mutual funds are tax-free. However, debt funds including MIPs would suffer capital gains tax at the time of your selling the units in these funds. If you hold the funds for less than a year then the gains would be short term in nature and will be taxed in the slab at which your regular income is taxed. If the units are held for over a year then a long term capital gain tax of 20 per cent with indexation or 10 per cent without indexation would be charged.

If you are aware and game for the risks and issues mentioned above, you can stay invested in MIPs. We shall however, suggest a few changes. HDFC MIP Long Term is a fund with a good track record of delivering 12 per cent annually since its launch in December 2003. It has returned 10.7 per cent annually (9.6 per cent net of a 10 per cent capital gains tax) in the last three years. Do continue to hold it.

Reliance MIP too is doing well but we suggest you review its performance every half year and compare notes with that of HDFC MIP Long Term. Magnum MIP (SBI) has not been doing well and has a below average track record. Instead, shift to Canara Robeco MIP. We do not know which scheme under HDFC Cash Management you hold. It would be either be a liquid fund or ultra short-term fund. These funds are normally resorted to when your liquidity needs are very high or as a short-term avenue to park some money temporarily. If your liquidity need is high, retain the fund. Barring liquid funds, most other debt or equity schemes charge exit load for redemptions made within one year of entry. If have no near-term requirement, then you can consider switching it to HDFC MIP Long Term. You can hold these funds until you need the money for a specific requirement. As these are not equity funds, there would not be much need to book profits at regular interval. Besides, your dividend option will ensure that profits are converted in to dividends frequently.

Other options

If you wish to have other options Birla Sun Life MIP II Savings 5 and UTI Mahila Unit Scheme (if a female member invests) are good options. Aside of these, given your risk appetite, we suggest you actively scout for attractive special fixed deposit rates that banks are currently offering. Bonds/debentures issued by a number of finance institutions are also other options.

You have asked for ‘good and secure' equity options. No equity option whether direct investment in shares or mutual funds can be termed secure. Hence, they would not strictly fulfil your requirement. However, if you can set aside some sum for say the next five years and can stomach market dips, you can consider SIPs in HDFC Prudence (an equity oriented balanced fund with some debt as hedge) and Franklin India Bluechip (a large-cap equity fund).

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