Invest in debt-heavy funds for parents

Debt-oriented funds or monthly income plans with a small portion of the portfolio invested in equities can be good options.

I am 23 years old and have no dependents. I invest Rs. 6,000 in tax planning schemes (ICICIPru Tax Plan, Franklin India Tax Shield, HDFC LT Advantage) and Rs 4,000 in other equity schemes (Sundaram Select Mid Cap, Magnum Contra). Is my portfolio optimally diversified? Further I need to select a couple of open-ended funds for my parents (senior government employees). The paramount concern for them is maximum security. They want preferably a government-owned fund house, which could deliver returns above those from PPF, GPF etc.

Rahul Daniel

Your fund selection is good. However, you can include Magnum Tax Gain as well in your tax-planning funds by dropping Franklin India Tax Shield. Even the selection of open-ended schemes is good. Overall your exposure between different market caps is balanced.

As far as funds for your parents are concerned, you must remember that mutual funds do not guarantee returns.

Further, there is no capital guarantee instrument that will yield returns better than the government-backed instruments that you are aware of. However if they are willing to take a little risk, you could look at debt-oriented mutual funds or monthly income plans that have a very small portion of the portfolio invested in equities. These funds have the potential to yield better returns than some government securities, but remember that there are no guarantees.

Can you please explain the basis for rating various funds?

Jayant Divekar

Value Research Fund Rating essentially assesses the risk-adjusted returns of funds. It is a convenient composite measure of both returns and risk. It is purely quantitative and there is no subjective component to the fund rating. It gives a quick summary of how a fund has performed historically relative to its peers.

The rating is determined by subtracting the fund's Risk Score from its Return Score. The resulting number is then assigned a rating based on a distribution grid. So your 5-star rated funds lie among the top 10 per cent performers.

We would also like to add a word of caution, the assessment of these ratings does not reflect Value Research's opinion of the future potential of any fund.

Value Research does not rate an equity or hybrid fund with less than 3-year performance and a debt fund with less than an 18-month performance track record. Each category must have a minimum of 10 funds for it to be rated. Given that there are 180 equity diversified funds to choose from, Value Research Fund rating facilitates an efficient fund selection. By looking only at the 5-star rated funds your universe of superior equity diversified funds is reduced to eight funds.

I am planning to invest Rs 8,000 per month in three ELSS schemes. For this I have short-listed four schemes namely, Birla Tax relief 96, Magnum Taxgain, Reliance Taxsaver and ING Vysya Tax Saver. Kindly help me choose the best three out of these four.

I also plan to put Rs 36,000 per annum in PPF account. For that I would be putting Rs 3000 per month in a recurring bank deposit and then transfer this money into the PPF account before March 5, 2008. Is this a good idea or is it better to put the Rs 3000 in a diversified mutual fund?

Chandan Kishore

Your choice of funds is really lacking a proper analysis. While Magnum Taxgain is a must have for every ELSS investor, the other three funds identified by you are just about average performers. We would recommend HDFC Taxsaver, Birla Equity Plan and HDFC Long Term Advantage, instead. Also in selecting these funds you must take cognisance of your portfolio's allocation to companies of different market capitalisation.

Of these four funds Magnum Taxgain and HDFC Taxsaver are large cap players while the other two invest predominantly in mid cap companies. As regards your question on avenues to park funds temporarily, as of now the interest rates offered by banks on term deposits have become very attractive. A recurring deposit with a maturity period of 181 to 365 days will offer you a return of between 6 -- 7 per cent. You can expect a similar sort of return from a short-term debt fund. The only difference being that in case of an RD the return will be guaranteed, however a mutual fund will not carry such a guarantee. Moreover, the returns on both these investments will be taxable.

I'm an ex-service personnel and since February 2006 I have invested Rs 15,000-20,000 each in about 21 different schemes of various fund houses. As of now I will need funds for the impending marriage of my son and daughter. Could you suggest any means by which my portfolio can generate profit? What should I do incase the market turns bearish? Is it better to redeem in such cases or is it better to institute an STP in other schemes. Also I could not understand the star meter in the portfolio makeover section.

Capt Suresh Chandra Sharma

To get an idea of the returns made by you, the BSE Sensex traded in the 9,700 -- 10,600 band during February 2006. As of now the Sensex is trading above 14,000 (As on June 9, 2007). So you would have definitely broken even on your investments and many would have yielded impressive returns in the short span of a year. Although, we always recommend investors with a large equity exposure to remain invested for a longer term (of at least three years), but since you need funds urgently, redemption is the only option.

On a more positive note, you can use this as an opportune time to trim your portfolio and rationalise your holdings. As you can see we have reduced your portfolio to 10 funds from an earlier high of 21. In doing so we have liquidated more than 50 per cent of your portfolio. We have also increased the allocation to large cap companies. In case you anticipate a need for these funds in the near future; we would advise you to start moving your equity investments towards debt funds in a phased manner. You could institute a systematic withdrawal plan (SWP) for this purpose. This will effectively insulate you from the volatility of the equity market.

As to your question on optimum strategies in a bearish market, our advice is not to panic. Time spent in the equity market is more important than timing the market. Hence, the best way to ride out a bear phase is to sit through it and wait for the cycle to turn. A systematic transfer plan (STP) is generally used to transfer a predetermined amount of money from a debt fund to an equity fund at periodic intervals. This is usually done by investors who have a large lump sum and do not want to commit to the market in one go. The STP mechanism can also be used by you incase you want to move funds from an equity fund to a debt fund.