Fund Talk

I am working as a clerk in a public sector bank and am getting gross monthly salary of 16,000. I am investing Rs 1,000 a month through SIP in each of the following funds: Magnum Contra (from August 2010 for 20 years), SBI PSU (for three years beginning August 2010), Templeton India Growth (December 2010) and HDFC Top 200 (for 10 years beginning February 2011). I also have Rs 500 a month SIP in HDFC Midcap Opportunities from February 2011. I invest Rs 1,000 a month in PPF. Which are the right funds to hold and which ones should I discard?

I.J. Balakrishna

Yellandu, AP

You have done well to limit the number of funds you hold. We would like to rejig your funds to suit your long-term requirements and to ensure optimal returns.

Magnum Contra, although sports an enviable 25 per cent return compounded annually since its launch in 1999, has slipped considerably in performance in the last five years. Given the fund's slackening performance we suggest you go for a superior fund.

Exit the fund although you would have incurred minor loss of 3 per cent. Use this lump sum to start an SIP in Quantum Long Term Equity instead.

SBI PSU is a relatively new fund and you appear to have bought it soon after its NFO. The fund, therefore, lacks a track record.

While PSU stocks can be defensive bets, they may not necessarily generate market-beating returns during a rally.

We suggest you continue this SIP for a year or so and then hold the fund, discontinuing the SIPs. Watch performance over the three years you have mentioned, but exit earlier if the fund does not beat the BSE PSU or the Sensex.

After that if you do wish to hold a theme fund, pick a banking fund such as Reliance Banking. The theme is less likely to suffer from any cyclicality, a characteristic of many businesses. Otherwise divert this contribution to HDFC Top 200.

Continue your SIPs in HDFC Top 200 which is among the best funds to hold in the large-cap universe. Continue your SIPs in Templeton India Growth and HDFC Mid-Cap Opportunities.

The former may not be a chart-topper but its consistent performance inspires confidence.

HDFC Mid-Cap Opportunities has done exceedingly well over the past three years.

However until mid-2010, the fund was close-ended and hence did not suffer from redemption pressures. Now that it is open-ended, you may have to review its performance on a quarterly basis.

Keep watch

Over the next couple of years, any additional savings can be used to invest in UTI Dividend Yield. Although you may have a 10-20 year investment horizon for these funds, you will have to assess their performances periodically and weed out funds that struggle to beat their benchmark for well over a year.

Similarly, any extraordinary market rallies, of say 60-100 per cent returns in a single year, should be utilised to book profits. Shift the money to safe debt avenues.

You can continue investing in your public provident fund. However, given that you are a public sector employee, you may be coming under the New Pension Scheme.

As these are now managed by asset management companies and initial data on returns made by them have been encouraging, you can consider increasing your contribution to New Pension Scheme.

*  *  * I am a 32-year-old self-employed dentist. I am currently paying Rs 50,000 a year towards my insurance premium. Given the current interest rate situation, I would like to know if I should go for tax-saving funds, fixed deposit, PPF or NSC? What are the other options to save tax? Will there be any change in ELSS under the new tax code?

Naveen Krishna

We do not know the nature of policy you hold but hope you are adequately covered. A simple term policy would do that for you.

Investors often confuse tax saving with returns. Sometimes these two simply cannot co-exist. Also it is important to look beyond mere tax savings to build wealth. When you think of tax, go for options that provide tax saving with least risk. A public provident fund, NSC and five-year bank deposit would fall in this category.

The post-tax yield on NSC is among the best at 12 per cent per annum. Public Provident Fund (PPF) comes next. Bank FDs are least attractive for tax-saving purpose. New Pension Scheme is another option.

However their returns would vary each year based on the fund manager's performance and the combination of debt and equity you choose. Equity Linked Saving Scheme (ELSS) and ULIP are definitely high risk options and may not necessarily offer high returns. The average return of ELSS scheme over a three-year period is 9 per cent compounded annually while it is at a poor 8.5 per cent over five years.

If you must invest in one, go for Fidelity Tax Advantage, given its superior performance. Note that from April 2012 ELSS schemes will not enjoy tax deductions.

You can also invest in infrastructure bonds (you need a demat account) which have so far come up with interest rates that yield as much as 14 per cent if you are in the highest tax bracket. However only Rs 20,000 is exempt for tax purpose.

One last word on the need to invest for optimal returns and not merely for tax saving. Explore outside of the tax-saving universe in options such as bonds, corporate deposits, mutual funds and direct equities for superior returns. You can earn a post-tax-yield that will comfortably beat inflation.

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