Mutual Funds

Invest systematically to reap benefits

K. VENKATASUBRAMANIAN | Updated on February 11, 2012

Have a systematic approach and invest for a period of 5-7 years to build a healthy corpus.

In recent times, I find that most of the mutual funds show good returns during a three-year period, and a poor return over five years. Does that mean we have to book profits in 3 years?

— K. Srinivasan

You have made a reasonable comment as far as fund returns are concerned. When we talk of three-year returns, we must note that it refers to returns from early February 2009. Now, this was the time when the equity markets were close to bottoming out. From those depressed levels, the markets made an astounding reversal from March 2009, and have subsequently more than doubled in value, and even made record highs in November 2010.

Naturally, equity funds that took the right sector and stock calls would have delivered robust returns. More than half the equity mutual funds have done better than the Nifty during this period. Compounded annual return of 35 per cent plus were quite common. But if one takes a five-year perspective, the market levels weren't that far off from current levels, and hence you see returns of 4-5 per cent. The last three years have been extraordinary and may not repeat itself. In fact during longer periods of time, the volatility of returns from equity mutual funds is lower. So, there is no thumb rule to book profits in three years, unless you need the money or have to rebalance your portfolio. Better still, take a systematic approach to investing in funds and keep investing for a period of 5-7 years for building a healthy corpus.

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I am 65 years old. I have already invested in bank deposits and post office schemes. I received Rs 10 lakh recently, and want to invest in mutual fund, so that I can get better returns. Please advice if I should choose growth or dividend payout option. I don't require regular return for my expenses.

— V. Dhanalakshmi

Invest this Rs 10 lakh in an FD, with a monthly interest payout. From this interest amount of, say Rs 7500, you can invest in mutual funds through the Systematic Investment Plan route. You can consider investing Rs 2500 each in HDFC Top 200, Quantum Long-term Equity and Canara Robeco Balanced in growth options for returns of 12-15 per cent during 4-5 years. We have suggested large-cap and balanced funds to keep your portfolio less volatile.

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I am a BPO employee, and willing to start investing some amounts in the market on a monthly basis, without any commitment. Suggestions have been given to invest in MFs. Please advice on how I should begin investing and increase my knowledge regarding all these things.

— Ganesh Kumthekar

It is good that you have chosen to invest in mutual funds. To begin with, invest only that sum which you wouldn't need for the next several years. You have to save and invest periodically (preferably monthly) for many years to build a healthy corpus, ideally directed towards a goal. Start by investing in large-cap funds or even (equity-oriented) balanced funds, to try the waters, before stepping up.

Read a financial newspaper every day to get a grasp of the markets. Visit mutual fund websites and read the fund manager's commentary. You can also look for innumerable web-based sources and personal finance sites.

(The recommendations made in this column address the readers’ query, based on their risk profile and requirement and may hence not be applicable to all investors.)

Published on February 11, 2012

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