Fund Talk

I am 28-years old. I started investing Rs 2,000 a month in Birla Sun Life Tax Gain three years ago for tax benefit. But I find the current performance of this fund disappointing. Is it wise to quit or should I continue to hold this fund? In addition to this, I have been investing Rs 1000 a month in DSPBR Equity fund. I have a few long-term goals. I need Rs 2 crore after 20 years and another Rs 1 crore 30 years from now. To achieve this goal, how much do I have to invest every month and in what funds? I can currently invest Rs 10,000 a month. I need your advice to plan my investment.

Raghavendra Hegde

Bangalore

It is not a good idea to invest in tax-saving schemes through the SIP route. Every instalment in the scheme is locked-in for three years from the date of investment. This limits you from exiting the fund entirely if performance is poor. This is the case with your investment.

We are not sure if you meant Birla Sun Life Tax Plan or Birla Sun Life Tax Relief 96. There is no fund in Birla Sun Life AMC called Tax Gain. Either way, both the tax-saving schemes have delivered middle-of the-road returns over a three-year period, if we look at lump sum investment made in October 2008. The returns, at close to 20 per cent, look good simply because October 2008 was one of the low points in the 2008 bear market. However, SIPs have not worked well in both the funds, with internal rate of return in the range of 7.2-8.5 per cent over the last three years. Top diversified funds have delivered double this return. Stop SIPs in your tax-saving fund. Sell units as and when they cross the three-year lock-in period. It is not a prudent move to face the risk of losing capital for the sake of tax benefits. We suggest you first exhaust traditional options such as Employee's Provident Fund, Public Provident Fund and National Savings Certificate for tax purposes before considering other options.

If you are very particular, you can consider investing a lump-sum in Canara Robeco Equity Tax Saver, dividend payout option, right now. The draft Direct Tax Code, as it stands today, does not allow deduction of investments made in tax-saving funds (under Section 80C) from April 2012. Unless there is a change, these funds may lose their tax benefit status from next year.

Financial Goals

To achieve Rs 2 crore, Rs 10,000 invested every month over the next 20 years together with the existing value of DSPBR Equity fund (assuming you have invested in the fund for three years now) should suffice, if the portfolio delivers 15 per cent per annum compounded annually. However, given that 20 years is a long way away, we suspect that returns would become more sombre as India stock markets mature. Hence, as a matter of prudence add another Rs 2,000 a month.

You can use the proceeds from sale of Birla Sun Life Tax Plan units (as and when you sell it) for this purpose. This should help keep the SIP alive for the next three years, post which you may have more savings in hand. For this Rs 12,000 a month SIP you can consider investing 40 per cent of your savings in HDFC Equity, 30 per cent in Canara Robeco Diversified Equity , 20 per cent in IDFC Premier Equity and 10 per cent in gold ETFs.

For your next target of Rs 1 crore over 30 years, we assume moderate returns of 13 per cent per annum as markets, over such a long time frame become unpredictable. If you are able to ramp up your savings by additional Rs 5,500 by say 2016, then SIPs over the next 25 years should fetch you Rs 1 crore.

For this portfolio you can consider holding Quantum Long-Term Equity, Fidelity Equity and HDFC Mid-Cap Opportunities in equal sums. If you are interesting in investing in value stocks in international markets, you can also add Templeton India Equity Income (by cutting back on Fidelity Equity) to the extent of 10 per cent of total SIP. However, run a five-year SIP and review this fund. You may discontinue it if it lags local diversified funds by more than 5 percentage points.

Monitor performance and book profits in all the funds in years of extraordinary returns. Exit equities if you achieve your goal ahead of the target date.

(Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.)

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