Mutual Funds

Your fund portfolio

Anand Kalyanaraman | Updated on January 10, 2018 Published on September 10, 2017

My son and daughter are keen to invest in mutual funds via SIPs. My daughter, 21, who is working now, can invest ₹10,000-15,000 per month and take risks for good returns. My son, 18, in college now, can invest ₹2,000-3,000 per month and take risk for high returns. The amount is small as he is investing from his savings from internship. Both plan to stay invested for a long term (15-20 years) and will increase the SIPs over time. Kindly suggest some mutual funds for both.

Niraj Mardia

You are a lucky man! Both your children are doing the right thing. One, they want to start investing early. Your children stand to reap rich rewards over the years from the power of compounding.

Two, they want to invest through the mutual fund route. Well-run equity mutual funds, while they can be volatile in the short term, tend to be more rewarding than debt options such as bank deposits and post office schemes in the long run. Equity mutual funds are also superior to putting money directly in stocks, especially for new investors who, lacking knowhow, could burn their fingers. Equity mutual funds are run by professional fund managers and invest in a basket of stocks, thus reducing risk.

Three, your children want to invest in mutual funds via the SIP (systematic investment plan) route. SIPs, thanks to the regular monthly investment in small doses, help benefit from market volatility by averaging cost of purchase. SIPs are especially recommended over lumpsum investments now, given the sharp run-up in the market.

Four, the investment horizon of your children is long (15-20 years); this is important because mutual fund investments can be volatile in the short run but do well over the long term. Finally, your children plan to increase SIPs over time. This will help them build a tidy corpus for big-ticket future plans.

Your daughter could start with four funds — three large-cap oriented and one equity-oriented balanced fund that invests mostly in equity and a portion in debt. From the large-cap category, Aditya Birla Sun Life Frontline Equity, ICICI Prudential Focused Bluechip and Reliance Top 200 are suggested; put ₹4,000 in each of these funds. In the equity-oriented balanced category, HDFC Balanced is a good pick; put ₹3,000 in this. We have recommended schemes from different fund houses to reduce concentration risk. For your son, starting a ₹3,000 monthly investment in Aditya Birla Sun Life Frontline Equity is recommended. The funds above have delivered mid-to-high teen annualised returns over the long term and figure in the top quartile in the category.

Large-cap oriented funds and equity-oriented balanced funds are less volatile than funds that invest mostly in mid-cap and small-cap stocks. This is especially important now, with the market seemingly overvalued after the sharp run-up. Mid-caps and small-caps could be hurt more in a market correction than large-caps. While large-cap and balanced funds may not deliver as well as mid and small-cap funds in raging bull markets, their ability to contain downsides is a key positive to motivate new investors like your children. The funds recommended above have demonstrated the ability to contain losses in weak markets and also participate in market rallies, thus giving a boost to long-term returns.

As they gain more understanding of MF investing, your children could increase their SIP contributions and also start SIPs in multi-cap and mid-cap funds. In the long run, the large-cap fund will lend stability to the portfolio, while the multi-cap and mid-cap funds will provide a kicker to returns. Young people with long-term horizons are generally better placed to ride out the higher risk associated with these multi-cap and mid-cap funds. It is best to stay away from riskier small-cap funds, with valuations in the category seemingly in frothy territory. But in the future, your children could consider adding a good small-cap fund when valuations correct.

Overall, restrict investments to 5-6 funds. Have a long-term horizon (at least 5 years). Review the performance of your funds once a year.

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Published on September 10, 2017

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