My initial years of investments (from the age of 30) started with investing directly in the stock market. I am now 50 years old. Investment in direct equity market is now limited to buying and selling with the available corpus.

Now my focus is on mutual fund SIPs. I hold the following funds: Rs 10,000 a month each in Birla Sun Life Mid cap - dividend plan and Fidelity Special Situations – dividend; Rs 12,500 a month each in Franklin Bluechip - dividend and HSBC Equity - dividend.

Should I change or continue the above investments? I wish to invest for the next 3-4 years to reach my goal of creating wealth of about Rs 70 lakh, including the existing corpus of about Rs 30 lakh in the above funds.

Chandrashekar

We hope you have adequate exposure to other asset classes, especially debt. Even if you have a high risk appetite, it is important that you do not put all your eggs in one basket (equities).

Yes, it is a good idea to invest in mutual funds if you cannot actively track the stock market and catch the right stocks. But mutual funds build wealth over the long term of 5-10 years. While mutual funds with a good track record may deliver optimal returns, please note that they may still not match the bumper returns that you may manage with one right stock pick. Hence, if you have been a successful stock market investor, temper your return expectations and also expand your time horizon for mutual funds.

Next, if you wish to build wealth with funds, you will be better off opting for growth option instead of the dividend payout option. Dividends are paid out from your NAV. So by sweeping them from the fund, you do not allow the money to compound, unless you diligently reinvest the dividends received.

Portfolio

Moving to your portfolio, two of the funds that you hold are underperformers. Birla Sun Life Midcap and HSBC Equity have lost out in the volatile market of the last few years and lag their peers by a good margin. You can exit them. Instead, start SIPs in ICICI Pru Discovery and Quantum Long Term Equity and continue SIPs in Franklin India Bluechip. By selling the above-mentioned funds, you will have a huge lumpsum. Invest this over the next one year (through SIPs) in HDFC Balanced and DSP BR MIP.

You have stated that you require Rs 70 lakh in four years. Your SIPs of Rs 45,000 a month over the next four years can help build about Rs 29 lakh, if they manage an annual return of 15 per cent. The Rs 30-lakh of money invested so far can compound to Rs 44 lakh, if it earns a post-tax return of 10 per cent. We are assuming lower return expectation here because we have suggested that you deploy the funds sold in equity-oriented balanced fund HDFC Balanced and debt-oriented fund DSP BR MIP.

Please note that four years is a rather short deadline, especially if markets remain as volatile as they were in the last 4-5 years.

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I am a 30-year old consultant earning about Rs 4 lakh a year. I can invest Rs 10,000-12,000 a month in mutual funds. I have a high risk appetite and can invest for the next 20 years in these funds: I have been investing Rs 2,000 each in Quantum Long Term Equity, Reliance Equity Opportunities, IDFC Premier Equity and SBI Magnum Emerging Businesses. In HDFC Equity and ICICI Pru Discovery, I park Rs 1,000 each. I realise that my portfolio is tilted towards small and mid-cap stocks but I am bullish about this market-cap segment.

Please suggest whether any change is required or the current choice of funds is fine, considering my investments are for the long term.

Satish Arakeri

You are currently investing about a third of your total salary in mutual funds. That is quite a high saving rate. But if your take-home pay is lower than the Rs 4 lakh you have mentioned, you must be a little wary of your ability to continue this savings in case you have other commitments like, say, a car loan or home loan to be repaid. If you are comfortable on this front and also have enough surplus in hand for emergencies you may go ahead.

One other point is whether you have sufficient investments in debt avenues such as provident fund. You need to hedge your high exposure to mid-cap oriented equity portfolio with some debt. You will do well to use tax-saving options such as provident fund or NSC to add some debt flavour to your portfolio. These will ensure that your portfolio returns are not volatile when markets turn sour and will also provide you with reasonably assured returns.

Moving to your portfolio, you are now investing about 50 per cent in mid-cap funds. As they are all sound ones, we feel you can hold on to them. The only note of caution is that you should be more active in tracking their performance and book profits in periods of high returns.

Also, even within the universe of mid-cap funds, some top performers sometimes slip down the performance chart. As these account for a chunk of your portfolio, you need to monitor them more closely. Ensure they beat their benchmark by 4-5 percentage points.

While mutual funds with a good track record may deliver optimal returns, please note that they may still not match the bumper returns that you may manage with one right stock pick.

You need to have a long term perspective of 5-10 years when you invest in mutual funds.

Queries may be e-mailed to >mf@thehindu.co.in

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