Fund Talk

I am 68 years old and have invested in the Post Office Monthly Income Scheme (POMIS) which fetches me a 8 per cent interest. Now, this investment will be maturing by mid-April and I want to explore better investment options such as Systematic Withdrawal Schemes offered by mutual funds, so that I may get a 10 per cent return. Please note that I can take risks for one or two years. I have invested in the LIC pension scheme available to the Senior Citizens which earns Rs 6,000 quarterly and Rs 3.3 lakh in Post office monthly income scheme, apart from the proposed re-investments. My monthly expenses are Rs 10,000 and the available amount for re-investment is Rs 6 lakh. I am also earning about Rs 15,000 per year as dividend income from equity investments. Kindly advise suitable schemes, preferably equity-linked schemes.

Radhakrishnan V.

Palakkad

Acquiring any fund with an equity component is not a great idea for a person who seeks regular income with a high degree of certainty, especially after retirement. Yes, on paper, funds such as monthly income plans or MIPs, which invest 80 per cent or more of their assets in debt instruments and 15-20 per cent in equity, have provided much better returns than the POMIS or other safe options.

The top performing MIPs from mutual funds have recorded a 10-14 per cent annual return over the past five years. However, those returns are not steady from year to year and are applicable for a person who entered these funds five years ago, in March 2006. There would have been periods in 2008 and 2009, when even the top MIPs actually saw their net asset value (NAV) fall, delivering a negative return to investors.

Two key risks

Investing in any fund with an equity component would mean bracing for two risks. If the stock market goes into a tailspin, the erosion in the equity portion of the fund's portfolio may eat away the returns from the debt portion. If the fund is a regular dividend payer, it may be forced to skip dividends in those periods.

Two, with any equity investment, there are no guarantees. MIPs may do extremely well if stock markets perform but deliver poorer returns than your safe options, if stock markets fall or remain range-bound. As no one can predict stock market direction over short periods for less than five years, you need to be prepared for these scenarios, if you invest in a MIP. Take the case of Reliance Monthly Income Plan, which sports a 14.7 per cent return over 3 years and a 11.4 per cent return over five. Now, this fund saw its NAV drop by 7 per cent in January-February 2009 and earned only a 6 per cent return in the last one year.

You can still ensure a monthly payout from such funds by setting up a systematic withdrawal plan, where you sell a certain number of units each month. However, if you sell units when the stock prices are low, you will effectively be drawing from your capital and reducing the annual returns on your investment.

Stepping up returns

However, we do understand your need to step up the returns on your portfolio, given the rising inflation. We have a few suggestions. One, interest rates on fixed deposit options have risen by nearly 1.50 percentage points over the past six months. Safe monthly income deposits with banks and NBFCs like Sundaram Finance today offer annual yields of 9.9 to 10 per cent for senior citizens. You should grab this opportunity to invest at least half of your corpus in such options, so that your monthly income is secured for the next few years. If you obtain interest rates close to 10 per cent, try and lock for the maximum possible tenure.

Two, invest another 30 per cent of your corpus in the Senior Citizen's Savings Scheme (available at India Post) which provides a 9 per cent annual interest, on a quarterly basis. Deposits here can be held for up to eight years (minimum lock-in of 5 years).

Three, if you still feel you can afford to risk a small portion of your portfolio in MIPs, select the ones which have a low equity exposure (10-12 per cent), with a conservative approach to their debt portfolio. We would suggest HDFC MIP Long Term or HDFC Multiple Yield 2005 through a systematic withdrawal plan or CanRobeco MIP as options for you to consider. As these are open end funds, you can monitor their performance and switch out if returns begin to slip.

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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