Mutual Funds

Your fund portfolio

Aarati Krishnan | Updated on January 08, 2018 Published on January 07, 2018

I am holding 25,832 units of UTI-ULIP 1971 scheme. I invested ₹4,000 per annum from 1990 for a period of 15 years until 2005. I am in the 30 per cent tax slab. I seek advice on whether to go in for a redemption of these units in January 2018 or to hold them. Declaration of bonus units is also pending in this scheme. The last bonus was given on September 2, 2014, in a 1:10 ratio. In case of redemption, the amount I would receive would be about ₹6.28 lakh. If you advise redemption, kindly tell me where I can reinvest this amount.

G Ram Kumar Rao

As you would like to reinvest this money, we presume that you don’t need to redeem this fund for reasons of immediate cash requirement. You can make your decision to exit the fund or stay with it, based on your risk profile and the period for which you can afford to remain invested.

If your objective is to maximise returns and you won’t be needing the money for five years plus, you can redeem your units in UTI ULIP and switch to a balanced advantage fund with a better track record. This would also be more tax-efficient. But if you are content with moderate returns with low volatility, there’s no harm in staying invested with UTI ULIP.

UTI’s ULIP 71 is a hybrid fund that invests about 40 per cent of its portfolio in equity instruments and 60 per cent in debt or cash equivalents. There are not too many funds with a similar asset mix in the market. Compared to aggressive debt-oriented hybrid funds, in the last five years, UTI ULIP has been a middle-of-the-road performer. It has delivered a 10.6 per cent return while the category average is 11.6 per cent. Many funds in the debt oriented hybrid category have a lower equity exposure of 25-30 per cent, compared to UTI ULIP and therefore have delivered better returns at a lower risk.

If one compares UTI ULIP to conventional balanced funds (65-35 equity-debt mix), it has underperformed these funds on returns, but has delivered a steadier return experience to investors. While UTI ULIP’s five-year return today after a big bull market is 10.6 per cent, the average balanced fund has managed 16.1 per cent on an annual basis.

But UTI ULIP has delivered a better experience to investors in the years when the stock market fell. In 2008, this fund managed to contain its loss to 15 per cent, when the average balanced fund suffered losses of 41 per cent. In 2011, again declined only 4 per cent while balanced funds as a category saw a 19 per cent dip in their NAV on an average.

If you can handle such blips in performance, but would like to maximise your long-term returns, you can consider switching to a balanced fund with a 65-35 equity-debt mix. Given that you are in the 30 per cent tax bracket, balanced funds would also offer greater tax-efficiency on the returns you earn compared to either UTI ULIP or the aggressive debt oriented funds.

Under the present tax regime (it may change in the Budget), the dividends you earn from balanced funds are tax-free in your hands. Any capital gains make after you hold on for one year are also completely tax-free. UTI Balanced Fund, Reliance Regular Savings- Balanced or L&T Prudence Fund are some conservatively managed balanced funds you can consider.

The possibility of a bonus need not in any way prevent you from redeeming your units in UTI ULIP. Bonus units do not in any way add to your returns from a mutual fund, as the NAV will immediately adjust in proportion to the bonus units issued and your redemption proceeds will not change due to the bonus.

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