Fund Talk

I am 53 years old and have taken retirement to focus on investment and trading. I have invested in both stocks and mutual funds. Returns from my investments in mutual funds are not up to my expectations and I would request you to suggest changes. Following are my investments: DSP BR TIGER Fund, IDFC Premier Equity, Reliance Diversified Power, Magnum Contra, Tata Equity PE, Franklin Smaller Companies Fund, ICICI Pru Discovery, Kotak Opportunities, Principal Large cap, Magnum Taxgain, Sundaram SMILE. My other queries are: Are there any good balanced funds in which long term capital gains are exempt similar to equity funds? Are there any commodities-based funds to take advantage of seasonal demand? Is it possible to successfully earn short term gains from mutual fund investments?

A.E Giridharan

We hope that you are looking to your equity investments only to supplement your overall monthly income, after retirement. Given the vagaries of the equity market, neither stocks nor mutual funds that invest in them can offer a sustainable source of income to meet a person's day-to-day living expenses. Therefore, we recommend that investors embark on equity investing only after they have provided for essentials such as living and medical expenses, protected their dependants through term insurance and stashed away savings in safe avenues.

Set the goals

Assuming that you have taken care of the above, we would ask you to first define what your expectations are from your mutual fund investments. If you are looking to build a certain corpus after 10 or 15 years, arrive at the goal first and then work backwards to decide on your choice of funds. Though equity investments in the Indian market have been known to deliver very high returns — even above 20 per cent on a compounded annual basis, it is best to set your expectations at realistic levels. A good way to set return targets would be to take the return from “safe” options such as bank deposits plus a premium for risk. By that yardstick, an investor today may expect a 15-18 per cent return from his equity funds. As the equity markets will swing wildly from year to year, those returns will not flow in steadily and will accrue only if you hold patiently for 5-10 years. The equity funds in your portfolio have delivered compounded annual returns of 13 per cent over a five year period, 9 per cent over three years and just 6 per cent in one year. With the exception of a couple of funds, most of your funds have beaten the Nifty over five- and three-year periods. Based on their track record, funds such as Magnum Contra and Taxgain, Franklin Smaller Companies and Kotak Opportunities have been the laggards in your portfolio. It may be best to cash out of these funds.

DSPBR TIGER and Reliance Diversified Power too have disappointed in recent years, but largely because the sectors in which they invest have been underperformers. As out-of-favour sectors could easily come back into favour during a market rally, you could hold on to these funds for now. We would suggest adding the Benchmark S&P 500 Fund to your portfolio to keep up with the broader market.

Now, to your specific queries:

Yes, balanced funds which invest over 65 per cent of their assets in equities enjoy the same tax benefits as pure equity funds. HDFC Prudence and and DSP BR Balanced are a few funds with a good five and 3 year record.

Indian fund houses do not manage any funds that invest directly in commodities. There are a few options for investors looking to invest in stocks of commodity companies. Magnum Comma Fund invests in stocks of Indian commodity companies. Apart from this, there are funds such as Mirae Asset Global Commodity Stocks Fund, DSPBR World Energy, Mining and Gold Funds, Birla Sun Life Global Commodity Equity Funds that take exposure to stocks of mining, natural resource or commodity companies listed outside India. However, each of these would have a diversified portfolio across many commodities and cannot be a short-term option.

Equity mutual funds are meant only for investors who can hold on for a minimum three-year period. Given that Indian stock market direction is largely decided by FII flows and that these are quite unpredictable, betting on equity funds for short term gains can be quite a risky proposition. However, theoretically yes, equity funds can deliver short term gains. If you manage to time your investment in an equity fund to a market low and if markets bounce back from those levels, the good equity funds will certainly follow suit. However, as most funds hold a diversified portfolio, they are unlikely to match the gains managed by individual small or mid-cap stocks in a rally. Using equity funds as a vehicle to “trade” on the market, by timing your moves isn't advisable. If you have the stomach for such risks, it is best to allocate a portion of your portfolio to individual stocks or at best Exchange Traded Funds, and use them as trading vehicles.

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