I am a senior citizen. I have been investing my limited resources in mutual funds for more than six years. I stopped investing in them after they stopped giving dividends as high as they were giving five years ago.  Whatever investments I had made, I had been redeeming them.  Now I am left with the following invested funds from which I have not been getting any returns. Their market values have also nosedived. 

In fact, I will not be able to get half of the invested amount today if I redeem any one of these: ICICI Prudential Tax Plan, Sundaram BNP Paribas Capex Opportunities, JM Basic Fund and Principal Large Cap Fund. I am interested in fixed deposits in Sundaram Finance or Shriram Finance where I have made investments.  The regular returns which I get from these investments are useful to me. 

Kindly suggest whether I should redeem all the five mutual fund investments for whatever amount I get from that.  Is there any point in postponing the redemption in any one of the specific investments? — Vidya Sethuraman  

Given that you are a senior citizen seeking regular income, equity mutual funds are not at all suitable for your portfolio. The funds you mention are particularly bad fits. ICICI Pru Tax plan, while a reasonable performer within the tax-planning category, invests a portion of its portfolio in mid- and small-cap stocks.

Sundaram Capex Opportunities and JM Basic Fund invest only in stocks from a specific sector or based on a theme. Such funds carry far greater risk than diversified equity funds because their returns depend on how the sector performs.

Do not rely on equity funds as a class to deliver regular dividends. This is because, unlike a stock, the dividends declared by a mutual fund come mainly out of the profits it makes on the capital appreciation on its own portfolio.

That is why you will find that all equity funds declared hefty dividends in 2007-08, a boom year for the stock markets, but several had to skip dividends in 2008-09 when stock prices crashed. Dividends from equity funds therefore tend to be erratic. Given the volatile nature of the returns they make, thematic funds certainly cannot deliver dividends year after year.

A fund investing in the ‘basic' industries theme, for instance, may only perform when the select set of stocks in the basic sectors — financials, energy, petroleum and so on — are in an up-cycle. Given that theme funds usually have a restricted mandate, they cannot switch to other more promising sectors, such as FMCG or media, if there is a downturn in basic goods.

Is there any merit in postponing exit from your equity funds? That will depend on your fund requirements. Given that stock valuations are at relatively depressed levels, there is a good possibility of stock prices and your beaten down fund NAVs recovering some lost ground over a two-year time frame.

But then, it is extremely difficult to predict stock-price movements. In any case, the very objectives for which you invested in these funds — regular income — may not be met by these products.

Therefore, we suggest that, if you require regular income, it is best that you redeem your investments early and re-deploy them in bank term deposits or other safe investments immediately. Interest rates on debt investments are high today after two years of increases.

This window of opportunity may not last for long, with the Reserve Bank of India already beginning to reduce policy rates.

Cash out of your thematic funds (JM Basic Fund and Sundaram Capex opportunities) first. ICICI Pru Tax Plan can be your next exit, while Principal Large Cap, the least risky of your holdings, can be sold last.

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