Fund Talk

I am a 77-year old retired executive, having major investments in equity shares and some mutual funds. I would like your advice to restructure my portfolio of funds to maximise dividend returns, preferably with capital appreciation also. I have no interest in debt funds and SIPs. Birla Sun Life Dividend Yield Plus, Birla Sun Life Infrastructure, Franklin Flexicap, ICICI Pru Top 200, ICICI Pru Tax Plan, Tata Infrastructure, UTI Midcap, UTI Banking, UTI Transportation & Logistics and Reliance Diversified Power Sector (all fund investments made in dividend option).

A. Sethuraman

Investors often have a popular misconception about the ‘dividend' option in mutual funds. For one, dividends are declared at the discretion of the mutual funds (both the timing and well as the quantum) and past dividend record cannot be construed as a trend for future dividend declaration.

Two, as the dividend is stripped from NAV and paid, you cannot expect significant capital appreciation if a fund regularly pays out dividends. Dividend options serve an investor's purpose if a regular stream of cash flow from investments is necessary. There is an element of re-investment risk in receiving dividends, as an alternative avenue may not fetch you similar or higher returns.

It is therefore difficult to ‘maximise' dividends by choosing a set of equity schemes. To the best of our knowledge, UTI Mastershare is one fund that has an uninterrupted track record of paying dividends for over 20 years now. The fund has missed many an opportunity in the market as a result of this regular dividend paying policy.

Restrict theme fund exposure

Coming to your portfolio, there is an obvious dominance of theme funds. Given your age, it is better that you restrict exposure to such funds. It is important to set a target return in the case of theme funds and sweep profits periodically.

Your choice of funds also suggests lack of a particular direction or strategy. For inflation-beating returns over the long term (around five years), a core-satellite approach would help. This means you should have a primary set of funds (called core portfolio) with a strong track record that are relatively safe, given your age. This should form the lion's share of your portfolio. The smaller ‘satellite' portion can contain risky bets, including theme funds – mid-cap, infrastructure, banking and so on, to prop up overall returns.

Moving specifically to your funds, except Birla Sun Life Dividend Yield Plus, exit all other funds as they have all delivered much lower returns than diversified equity funds over the past five years. Industries such as construction, power and capital goods, on which themes such as infrastructure hinge, have been languishing in the market. With rising interest rates, it is uncertain when they will bounce back. For your core portfolio, invest in HDFC Top 200, UTI Dividend Yield, Birla Sun Life Dividend Yield Plus and Quantum Long-term equity. As you have a large portion invested in Birla Sun Life Dividend Yield Plus already, redeploy it equally among the above funds. These are diversified equity funds with a large-cap bias and hold a record of beating markets in rallies and containing declines in falls. If you must, choose the dividend option in these funds. Given your risk appetite, invest in IDFC Premier Equity and HDFC Mid-cap Opportunities for your satellite portfolio. These funds, though focussed on mid-caps, have delivered superior returns over the last 3-4 years.

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Which are the best performing index funds, both for large-cap and mid-cap categories?. Also please let me know whether the SIP or VIP option will be ideal for a long-term period of, say, three years. And please list mutual funds that offer VIP options, and for which schemes.

Asish Kumar Chatterjee

The best index funds are those that give almost the same returns as the index that they track – the Sensex, Nifty or CNX 500. Of course, there are index-plus plans that would generate higher returns than the indices. Some of the best index funds for the long-run are HDFC Index Fund – Sensex Plus, ICICI Index Fund – Nifty Plan, Franklin India Index Fund – Nifty Plan and the Sensex Plan as well. The few funds in the mid-cap index space do not have a proven record as yet, except for Benchmark's CNX 500. VIP (value averaging) is suitable only for investors who can handle fluctuating cash outflows(compared with the fixed cash outgo in a traditional SIP); as the number of units bought can vary disproportionately every month based on the market movements. VIP investments have been shown to lower investment cost and improve returns over the long term.

For a detailed analysis of VIP investment, please check the Business Line article of July 3, 2011, titled ‘The VIP way to lower investment cost'. Right now Benchmark Mutual Fund allows VIP in the CNX-500 index. There are also other mutual fund portals that allow you to set up VIPs in several mutual fund schemes.

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