Mutual Funds: For a two-year horizon, it’s advisable to stick to debt funds

By: | Published: September 1, 2015 12:03 AM

SIPs, besides encouraging regular and systematic investments into mutual funds, also provide the benefit of rupee-cost averaging.

As markets have become very volatile, should I reduce my quantum of SIP for one year?
—  Prabhat Shah

SIPs, besides encouraging regular and systematic investments into mutual funds, also provide the benefit of rupee-cost averaging. Hence, an SIP of a fixed amount would purchase more units when markets (and, therefore, the fund NAV) are at lower levels vis-à-vis when they are at higher levels. Over a long period of time, this should help reduce the average cost per unit purchased, assuming markets don’t remain at the same level. Provided that your investment objective and horizon haven’t changed, reducing the quantum of SIP is not needed.

Is is better to invest in a diversified large-cap equity fund or stick to some sectoral themes like infra or banking for a two-year horizon?
— Ankur Singh

Investments in equity are typically recommended for a horizon of at least 3-5 years. This is due to the volatile nature of equities, particularly over shorter time frames. For instance, the probability of generating negative returns over a one-year holding is around 32% based on an analysis of the performance of equity markets since 1995. Over a three-year period, this probability reduces to 17% and further to 13% for a five-year period. For a two-year horizon, it would be advisable to stick to debt funds, unless one has specific view on the equity market or a particular sector.

Should I invest in gold ETFs to diversify my portfolio?
— Aditya Kumar

Historically, gold has acted as a good hedge against inflation and financial market volatility. For example, from early 2008 to 2011 when equity markets witnessed significant volatility, gold generated an annualised return of 26.8% (three- year period). But, unlike equity and debt, which typically pay out either interest or dividends, gold isn’t an income generating asset.

Further, a long term analysis of the performance of various asset classes indicates that gold underperforms equity.

Over a 25-year period starting 1990, equities have generated an annualised return of 15% vs 10% for gold. Overall, gold acts as a good portfolio diversifier, but due to its performance and income-related characteristics outlined above, allocation may be limited to 5-10% of one’s portfolio.

Can you suggest funds for monthly or quarterly income over a period of five years?
— Rajesh Gupta

Most mutual funds schemes, including those in equity, debt and hybrid categories, offer dividend options through which regular payouts can be made to investors. But since the performance of mutual funds is linked to market performance, either debt or equity, the payouts or dividends may vary from time to time. In case a fixed payout is desired, one can opt for a Systematic Withdrawal Plan (SWP). Herein, one can determine the frequency and desired amount of withdrawal and the AMC would redeem the required number of units on the pre-determined date to meet the withdrawal.

The value of the underlying corpus would continue to be market determined and the SWP would continue till the end of the desired period or exhaustion of corpus, whichever is earlier.

What kind of pension funds should I opt for and how much pension can I expect after retirement 30 years from now?
— Parag Shankar
There are a few pension or retirement funds available on the mutual fund platform. Some of these funds also provide tax benefits under Section 80C of the I-T Act with a deduction of up  to R1.5 lakh per annum available on the amount invested in such funds.

These funds invest in a mix of equity and debt instruments in varying proportions ranging from 30% to 100% in equity and the remainder in debt, during the accumulation or pre-retirement phase and typically up to 40% in equity during the post-retirement or withdrawal phase.  Some funds also offer separate fund options for the pre-retirement and post-retirement phases with varying levels of equity investment. Post-retirement, one can withdraw from the scheme using a SWP, either at a monthly, quarterly, semi-annual or annual frequency. The SWP amount can be fixed at the time of retirement and would continue till the investment corpus is exhausted. Since the corpus is invested in market-linked instruments including equity and debt, it could fluctuate based on the market value of the underlying holdings.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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