I am a student and want to cover my educational costs (Rs40,000 twice a year) and insurance (Rs30,000 a year). Currently, I get a stipend of Rs25,000 a month and I’m investing Rs5,000 through SIP in a Mirae Asset Management Co. fund, but that is for the long term. Could you help me plan for the recurring payments? If I redeem the entire money after a year from the first instalment, do I have to pay exit load on the other 11 instalments?
—Apurva Tiwari
As much as I see mutual funds as a solution for a variety of investment and financial planning needs, there are situations where a simpler solution would be warranted. And I think the situation that you are outlining is one such. It is good that you are investing Rs5,000 in an SIP for the long term. However, your educational and insurance costs are fixed and very short-term oriented. The potentially higher returns you could get from mutual fund investments would not be worth the risk you would incur, since you would be investing only for a short term. My recommendation would be to choose a high-interest bank savings account and use that for these short-term needs. If you are keen on mutual funds, you should consider only the least risky category of liquid funds for this purpos. To your second question: yes, every SIP instalment would be treated as a separate investment and subjected to exit load for the prescribed period starting from the date of the instalment.
I am 21. Over the past 3 years I have invested Rs5,000 a month in Franklin India Smaller Companies Fund and Reliance Small Cap Fund through SIPs. I have now stopped buying the Franklin fund. As I have a time horizon of over 30 years, I can take the risks of investing in small-caps, which are at all-time highs. I plan to keep investing even during a slowdown, thereby averaging my cost in the long run. Should I continue in these two funds?
—Yash Sanghavi
It is quite impressive that you started investing systematically at the young age of 18—an age when most people are still considering their graduation major in college. It is also impressive that you are considering investing for the very long term and that you have a mature outlook towards how to stay invested in the market. However, you should take care to not evaluate funds by their recent short-term performances, especially in volatile categories such as small-cap funds. Franklin India Smaller Companies fund is a good scheme and you should stay invested in it. But, in the interest of having an overall diversified portfolio for the long run, it would be good to do a bit of a rejig in your portfolio. You are currently investing in only one segment of the market and I would recommend you spread your investments a bit more. With Rs10,000 as your monthly investment amount, you have the opportunity to do so.
With this in mind, I would suggest the following reallocated portfolio: a 50% allocation to a large-cap fund such as Aditya Birla Sun Life Frontline Equity fund, a 25% allocation to a diversified fund such as ICICI Prudential Value Discovery fund, and the remaining going to Franklin India Smaller companies fund that you are investing in. Such a portfolio, if you stay invested in it, will provide handsome returns over the long run.
What is the key to investing in mutual funds when one is planning for a goal?
—Keval Sharma
The key to putting together a good mutual fund portfolio for a goal-oriented financial plan is getting the right asset allocation. When investors have a goal in mind, they have a clear sense of what they are trying to achieve (in terms of the amount of money) and when they are trying to reach that goal. When these are in place, the most important thing to decide would be the type of assets—such as equity, debt, liquid or gold—that would form part of the portfolio and the proportions thereof. The investors’ tolerance for accepting market volatility (risk profile) would also play a part in this decision. For example, if a conservative investor has a 7-year time frame to reach a goal, then an asset allocation of 50% in equity and 50% in debt would be suitable. Once such an asset allocation is decided, then selecting good funds to fit this allocation can be done confidently. In terms of successful mutual fund investing, the top three important keys to success are: defining a goal, identifying the asset allocation to fit the goal, and choosing good funds to fit the allocation.
Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com.
Queries and views at mintmoney@livemint.com