I’m 25 years old. I draw a salary of ₹26,000 per month. My primary goal is to get inflation beating returns. I started SIPs four months ago, based on BL Star Ratings. Please suggest if I have to increase the monthly contribution. My monthly savings are ₹13,000. My SIPs are as follows: ₹1,000 in L&T Balanced Advantage Fund, ₹500 in HDFC Hybrid Equity Fund and ₹500 in Tata Balanced Advantage Fund.

Rohit

You need to choose your fund categories based not just on your return expectations but also on your investment horizon and risk appetite. Balanced advantage funds, by mixing equity, debt and derivative positions in roughly equal proportions, strive to give debt-plus returns with equity taxation and good downside protection compared to pure equity funds. They may thus be suitable for you if your investing horizon is shorter (say, 4-5 years) and you do not want to risk significant capital losses at any time during your investment journey.

In the last five years, good balanced advantage funds have delivered CAGR of 11-12 per cent. But given that you are starting out this investment when stock markets are at elevated levels and rates are at record lows, you need to have moderate return expectations for the future. Hybrid equity funds as a category are riskier than balanced advantage funds because they park 65 per cent or more of their portfolio in pure equity (without derivatives) and the rest in debt. During market falls, aggressive hybrid funds can lose as much as pure equity funds. They are again suitable for 5 to 7-year horizons and your starting off at high market levels both on equity and debt can be a disadvantage. Based on BL Star Track ratings, ICICI Pru Balanced Advantage and ICICI Pru Equity and Debt are top rated funds to consider in these categories. If you have an investment horizon of 7-plus years and don’t mind capital losses over shorter horizons, you may have a better shot at inflation beating returns with pure equity funds than with hybrid categories that mix equity and debt. In this case, invest in Nifty100 index funds or Nifty Next50 index funds.

Your savings and monthly SIPs should ideally be dictated by the size of the financial goals you have in mind. Given that you may not have charted them out yet, strive to save at least 15 per cent of your take-home pay, which will amount to about ₹4,000 per month. Do ensure you increase your savings every year by 5 per cent to account for increments and inflation.

I have a SIP of ₹3,000 in Axis Long Term Equity for the last few years. From this accumulated investment I am doing an STP of ₹1,000 to their bluechip, mid-cap and small-cap funds. Similarly, I invest in Aditya Birla Sun Life Tax Relief and do an STP of ₹1,000 into their GenNext and Digital India Fund. Please let me know whether my decision is correct.

Thomas

Systematic Transfer Plans or STPs are used when you would like to invest a lump sum in debt funds that preserve your capital and want to move money slowly into equity funds, in order to reduce the risk of capital losses from getting in at the wrong time. You have essentially been investing in tax saving equity funds and doing STPs into other equity funds. There is really no need to follow such a strategy. Axis Long Term Equity is a highly rated tax saving fund with a flexicap mandate. There is no real reason to move money out of it into Axis Bluechip, Midcap and Smallcap funds. If you are doing this to get to a specific small or mid-cap allocation you can do it without routing the investment through Axis Long term Equity. Similarly, Aditya Birla Tax Relief is a decent performing fund over the long term. It follows a flexicap mandate and is a diversified equity fund. Therefore, moving money out of it into thematic funds such as GenNext or Digital India which focus on narrow themes and may require you to time your exit, is not a sound move.

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