INVESTMENT IN MUTUAL FUNDS

I am a teacher by profession and newly married. My husband is an engineer. Please take a look at our existing portfolio and suggest improvements. We don't see any reason to withdraw money from mutual funds in the near future. About 45 per cent of my portfolio is in mutual funds, about 38 per cent in direct equities and 17 per cent in fixed deposits. This was invested before marriage. We are currently running SIPs of Rs 1000 each in the following funds: Birla Sunlife Frontline Equity, Birla Sunlife Tax Relief '96, HDFC Prudence, DSP BR Equity and UTI Dividend Yield. Besides, we are planning to start a new SIP of Rs 2000 per month in Reliance Regular Savings fund.

If dividend reinvestment and growth are two ways of getting similar returns then why are they available as two options? Are the units allotted as dividend in an ELSS fund also subject to a lock-in of 3 years?

Pooja Pratihasta

We appreciate your early initiative to save and build wealth. You hold a good portfolio of funds. However, with a double income and perhaps higher savings now, you should be able to take on a little more risk in your fund portfolio to prop up returns. Clearly, the fact that you have direct exposure to equities suggests that you are not a conservative investor. The funds you hold currently, though they have a good track record, could be termed the core of your portfolio. We would like you to build a satellite of few other funds that can provide a kicker in terms of returns.

Hence, we suggest some re-jig/additions to your portfolio. Assuming that both of you would invest, you can consider holding five funds each, to begin with. Between you and your spouse, one of you can continue SIPs in Birla Sunlife Frontline Equity while the other can invest in DSPBR Equity.

Hold on to Birla Sunlife Tax Relief 96 until the lock-in and exit if you have made annual returns of over 10 per cent. While this fund sports a healthy 20 per cent annualised five-year return, its three-year record is a measly 6.6 per cent (most funds have seen a setback in their three year record as a result of the 2008 correction). If you are an active observer of the stock markets, continue your direct investing approach.

Satellite

If you are hard-pressed for time – stock markets are increasingly going to require more work to spot trends/picks – consider shifting some portion of your direct equity investments into mutual funds.

For this purpose, you can assume similar risks by adding a dash of mid-cap funds such as IDFC Premier Equity and Sundaram BNP Paribas Select Midcap. Even if you keep an SIP running on mid-cap funds, it pays to buy these schemes on declines linked to markets. For instance, every 5-10 per cent decline in the broad market index can be used to accumulate more units of mid-cap funds. Review the funds every year, before renewing SIPs.

ETFs

Besides these, one of you can consider holding gold ETFs; again buy them on declines. A value-averaging strategy on the S&P CNX 500 index fund (offered by Benchmark Mutual) would help you hold a wide basket of stocks that represent a good part of the listed universe. This index has traditionally been a tough benchmark for mutual funds to outperform. Add UTI Mahila Unit Scheme. This fund boasts an excellent track record and would provide some debt exposure to the portfolio, without being too conservative in its choice. While UTI Dividend Yield, has an above-average track record, Templeton India Growth may be a superior option for any fresh investments, if you are looking at a value-oriented approach.

Reliance Regular Savings Equity is a very volatile fund, though it outperforms most peers by a huge margin during rallies. It would be a fund to invest during steep market corrections if you actively track markets. But do set target returns to book profits. We would not suggest an SIP strategy on the fund.

Hold at least 20-25 per cent of your portfolio in debt options. Consider booking profits on your mutual funds, as and when the equity:debt ratio undergoes a change of over 10 per cent. You can even park such profits booked in debt funds such as UTI Mahila or HDFC MIP Long Term and use them to invest during steep equity corrections.

Dividend reinvestment

True, there is no difference in returns between dividend reinvestment and growth options at present. The former just allows you to hold more units over a period, instead of allowing the profit to accumulate in the NAV. However, if all capital gains (whether short or long term) are taxed as proposed by the new tax code, dividend reinvestment would be a superior option from a taxation perspective as the reinvested units would go to increase the cost of your funds and would to that extent, reduce the value of gain for tax purposes. Yes, units allotted under dividend reinvestment option of ELSS would be subject to fresh lock-in of three years.