Fund Talk

I work in a public sector undertaking. I have 18 more years of service left. I will need to plan in six years' time to meet the marriage expenses of my daughter. I also need to save for my retirement.

Please suggest whether I can continue investing in the following funds: Rs 1,000 each, started in January 2009, in Sundaram BNP Paribas Select Focus (dividend) and Reliance Growth; Rs 1,000 in Birla Sun Life Front Line Equity started in October 2009; Rs 1,000 each in Templeton India Growth, and Reliance Tax Saver started in July 2010; Rs 1,000 in Sundaram BNP Paribas S.M.I.L.E started in August 2010; Rs 1,000 each in HDFC Top 200 and Reliance Equity Opportunities started in October 2010 and Rs 1,000 in UTI Dividend Yield from August 2011.   

  Sailaja, Vijayawada

We hope you have set yourself a target on how much you need for your daughter's wedding as well as for your retirement. Do keep in mind that inflation can only balloon the amount you need later. For instance, a Rs 5 lakh wedding today may cost Rs 7.3 lakh after five years, if prices went up by 8 per cent every year.

Setting the goal after taking inflation into account will help you determine how much to save. For instance, your total SIP of Rs 9,000 a month, if invested for the next five years, will provide you with about Rs 8 lakh, if your fund portfolio delivers a compounded annual return of 15 per cent. We are constrained from commenting on your savings, given that you have not mentioned the targeted sum. You can use the financial calculators available online to work this out.

Moving to your funds, you can continue investing in Birla Sun Life Frontline Equity, UTI Dividend Yield and Reliance Equity Opportunities. To avoid holding two large-cap funds, switch from HDFC Top 200 to HDFC Equity. Stop SIPs in Reliance Tax Saver as every instalment will be locked in for another three years under the present law. After the three-year lock-in, exit Reliance Tax Saver and divert the sale proceeds to any of the funds recommended.

You can exit Sundaram Select Focus as the fund has not kept pace with some of the top large-cap peers. Exit Sundaram S.M.I.L.E and Reliance Growth too as they have underperformed good mid and small-cap funds. Templeton India Growth is a steady performer. But we suggest you exit it, simply to compact your portfolio.

You can therefore run SIPs of Rs 2,000 each in HDFC Equity, Birla Sun Life Front Line Equity, Reliance Equity Opportunities and UTI Dividend Yield. To this, add Rs 1,000 a month SIP in a gold fund-of-fund from any of the fund houses — Reliance, Quantum or Kotak.

After five years, slowly shift your daughter's portfolio to safer debt options such as bank deposits or liquid funds. 

Retirement 

From the funds that we asked you to exit or switch, you will receive about Rs 1.32 lakh. We have assumed that other than the dividend payout schemes mentioned by you, the rest are either growth or dividend reinvest options.

Use this sum to start your retirement kitty, if you feel that the current Rs 9,000 a month investment would suffice for your daughter's wedding. For your retirement, invest in Quantum Long Term Equity and HDFC Mid-Cap Opportunities for now. If you are utilising the sale proceeds of Rs 1.32 lakh, SIPs of Rs 1,100 a month in each of the two funds will help you continue these SIPs for five years. Later, when your savings free up after your daughter's wedding, add a couple of funds based on the performance of mutual funds then. It is yet six years away.

Avoid investing in dividend options in all the above schemes. You will never get to enjoy the power of compounding by taking away the dividend. Instead allow it to grow as a part of the fund NAV.  Besides, growth options best serve to build a long-term portfolio. Try to increase your savings gradually, especially for your retirement kitty.

 *** A friend of mine holds a mutual fund investment of Rs 4 lakh. It was made as a lump sum investment several years ago. However, the present value of the NAV is low and the value is only around Rs 3 lakh. She desires to sell it now and recover whatever money she can. However, my advice to her is that she can offset the loss against capital gains tax. Is my understanding correct?

Kalyanaraman

The answer to your question would depend on whether your friend holds an equity fund or a debt fund. In case of mutual funds, an instrument held for over a year is considered long-term for the purpose of taxation.

Long-term capital loss, in general, can only be set off against long-term capital gain. However, long-term capital gains, whether in stocks or equity mutual funds, is exempt. Hence, the loss cannot be set off against what is exempt. In effect, if it is an equity fund, your friend cannot avail any set off.

In case of a debt fund, long-term capital loss can be set off against any long-term capital gain from any taxable gain from assets, including debt funds or property. The loss can also be carried forward for eight assessment years, until set off against long-term taxable gain. 

(The recommendations made in this column address the readers’ query, based on their risk profile and requirement. They may not be applicable to all investors)

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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