Mutual Funds

Fund Talk

K. VENKATASUBRAMANIAN | Updated on July 23, 2011

Setting your goals is important to decide how much funds to invest, and in what instruments.

We are regular readers of Business Line, particularly the mutual funds section. I am 85 years-old and wish to invest in 5-6 mutual fund schemes which can give 15 per cent annual returns in three years' time. Looking at my age, a 5-7 year timeframe is not suitable. I will invest only in lump-sum, as SIPs are not suitable for me.

Please suggest from these schemes(all growth plans): HDFC Prudence, HDFC Equity, IDFC Premier Equity – Plan A, UTI Dividend Yield, ING Dividend Yield, HDFC Growth, ING Dividend Yield, ICICI Pru Discovery, Quantum Long-term Equity, HDFC Top 200 and DSPBR Top 100 Equity. Hope you will advise which funds I can buy from the above or any other fund suitable for our purpose.

JCM

It is commendable that at your age, you are still contemplating dabbling with equity, albeit through mutual funds. Be that as it may, there is an old thumb rule in making asset allocation decisions which says that your age subtracted from hundred should be the proportion of your assets invested in equity, including mutual funds. So, ideally, equity mutual funds should not exceed 15 per cent of the overall portfolio in your case.

We assume here that you have made sufficient investments in deposits, bonds and other ‘safer' avenues to fortify your portfolio. Coming to your query, you are constrained by a few factors. First, your investment window is only three years, when, ideally, five-plus years would help generate superior returns. Generating 15 per cent annual returns over a three-year period is far more difficult than over, say, 5-7 years.

Second, you want to invest a lump-sum, which would subject the entire sum to vagaries of the market, as timing the entry is very important, as opposed to the phased nature of SIP investments. Third, there is no goal you have stated towards which you want to invest, which is very important before deciding when, how much and in what instrument(s) to invest.

Capital protection

Given your age and investment horizon, capital protection funds or debt funds would be most suitable for you. But these may not deliver the returns that you expect. With reference to equity mutual funds, here are some indicative statistics: Over the last three years, large-cap funds as a category have delivered 12.5 per cent compounded annual returns, mid-cap funds achieved 15 per cent, while equity-based balanced funds generated 13.5 per cent. Of course, the best performing funds in these categories have outpaced the average by five percentage points and, in some cases, even to the extent of 10 percentage points.

The funds you have listed are all of fairly high calibre and have demonstrated a fine track record in delivering returns over the last 5-10 years.

Restricted downside

We suggest the following funds for you. HDFC Top 200, Quantum Long-term Equity, UTI Dividend Yield are the three funds you must have. These have contained downsides well in the 2008-09 period, and have participated in the subsequent rally. These funds also have a strong five-year track record and take predominantly large-cap stocks exposure and generally restrict themselves to the BSE 200 universe, which is better suited for you. You can consider adding ICICI Focussed Bluechip Equity, which has a reasonable three-year track record and sticks to its mandate. You can choose either HDFC Equity or Fidelity Equity, as both have a multi-cap focus, though the former has delivered superior returns over the long-term. Fidelity Equity tends to contain slides in NAV better than HDFC Equity.

Although DSPBR Top 100 is a good fund with a long track record, it has lagged peers over the last one- and three-year periods. It lagged the Nifty significantly in the rally from March 2009. For added safety, you can consider investing in HDFC Prudence, which is a balanced fund with an excellent track record. ICICI Pru Discovery and IDFC Premier Equity are mid-cap funds. These funds, if added would considerably perk up the risk-profile of your portfolio. Both, especially IDFC Premier Equity, have an impressive long-term track record over a 5-6 year time-frame. This fund also limits lump-sum inflows periodically.

Given your limited investment horizon it would be best to steer clear of such funds.

Published on July 23, 2011

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