Your Fund Portfolio

I am 27 and working as an officer in a public sector general insurance company. My monthly investments are in NPS Tier- II (₹10,000) and mutual funds (₹3,000 in Franklin India Taxshield Direct Growth (for tax saving under Section 80C) and ₹5,000 in SBI Blue Chip Fund Growth). Are my investments ok?

I can invest ₹15,000-18,000 per month, which I am doing. Please suggest a way by which I can get a good return in the next 10-15 years. Also, what is the difference in returns I can get in the NPS tier II vis-à-vis mutual funds?

Gyanu Thapa

Both the funds you are investing in — Franklin India Taxshield and SBI Bluechip —have a good long-term track record, having done better than their benchmarks and figuring in the top quartiles of their fund categories. Their one-year performance is relatively not very impressive, but this is likely due to the conservative positions adopted by the funds — a prudent approach in the ongoing raging bull market.

In any case, a year is too short a time period to evaluate performance. You can continue investing in these funds.

NPS Tier II schemes, similar to NPS Tier I schemes, are low-cost and have given robust returns. But unlike NPS Tier I, there are no tax breaks on investments in NPS Tier II. On the other hand, unlike NPS Tier I, NPS Tier II is highly liquid — you can withdraw from it any time.

Essentially, NPS Tier II schemes are akin to mutual funds, with investments in equity, corporate debt and government securities. Low costs have meant that they have also done better than many mutual funds.

But compared with mutual funds, NPS II suffers a major drawback — unfavourable tax treatment. Gains on equity mutual funds are exempt from tax if the units are held for over a year, and taxed at 15 per cent if held for a year or less.

On debt mutual funds held for more than three years, gains are taxed at 20 per cent with indexation benefit. There is no such benefit for NPS Tier II schemes.

All gains on NPS II accounts are taxed at the investor’s slab rates. As a result, the post-tax returns on NPS II accounts will likely be lower than mutual funds, at least for long-term investments. Until NPS II is given favourable tax treatment comparable to mutual funds, it may not be a worthwhile investment option.

You can stop your monthly investment of ₹10,000 in NPS II investment and shift it to other well-run equity mutual funds, given your long term horizon of 10-15 years.

You can invest ₹5,000 each in Aditya Birla Sunlife Frontline Equity fund and ICICI Focused Bluechip. Like SBI Bluechip, these too are large-cap funds with a good long-term track record. Franklin India Taxshield also invests mostly in large-cap stocks.

Large-cap oriented funds are less volatile than funds that invest mostly in mid-cap and small-cap stocks. This is important now, with the market seemingly overvalued after the sharp run-up.

While large-cap funds may not deliver as well as mid and small-cap funds in raging bull markets, their ability to contain downsides is a key positive.

The funds recommended above have demonstrated the ability to contain losses in weak markets and also participate in market rallies, thus giving a boost to long-term returns. With schemes from different fund houses, the concentration risk is also reduced. In the future, as your investible surplus increases and market valuations moderate, you can also consider adding riskier multi-cap, mid-cap and small-cap funds in your portfolio.

Overall, restrict investments to 5-6 funds. Have a long-term horizon (at least five years) and review the performance of your funds once a year.

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