Critical Corrections

In an exclusive show on All India Radio, titled Market Mantra, Dhirendra Kumar, CEO, Value Research, provides answers to listeners’ queries to help them make better and more informed decisions on investing their money to reach the goals they aspire to achieve. Here are the excerpts:

I have invested in SBI Capital Protection Oriented Series 2007. Should I remain invested, or quit? What about Reliance Infrastructure Fund? Should I invest in that, say around Rs 50,000?

First, I don’t think you have any choice in the SBI Capital Protection Oriented Fund. Capital protection funds are devised in a manner that they are closed-end, so you have to hold till maturity, which is 5-6 years from the date of investment.

Second, about Reliance Infrastructure, my view is that infrastructure holds some promise, but it is not necessary for you to go with the trend. There are about a dozen proven funds to choose from and I would advise you to pick one of them.

Reliance Infrastructure Fund NFO has closed. What should we expect from it? Is it advisable to invest in this fund or any other fund right now? Should I invest through an SIP, or should I do a lump sum investment?

It is always desirable to invest regularly than making a lump sum payment. And if one has to choose between an unproven fund and a proven fund, based on very conventional wisdom one should be choosing the latter. I would say that infrastructure holds promise and you can choose from an existing fund with a credible history of doing well in a falling as well as rising market. And if I have to choose 2-3 funds then I would say that ICICI Prudential Infrastructure Fund, UTI Infrastructure Fund or a DSPBR T.I.G.E.R. Fund are reasonable choices too.

It was reported that entry load will not be charged any more. Can you elaborate?

Yes, the Securities and Exchange Board of India (SEBI) has brought changes in the rules. Earlier, in India, equity funds could charge entry loads which used to be around 2.25 to 3 per cent. SEBI has said that the entry load money used to flow from the customer to the fund house and then the fund house would pass on the amount to the fund advisor or the agent or the distributor. Now this will not be the case. Whatever amount you intend to give to your advisor for his/her service, you should pay to them directly based on what ever is decided between the two sides.

I invested Rs 50,000 in the Tata Indo Global Infrastructure fund two years ago. It fallen to around Rs 35,000. What shall I do?

I think it is proving to be a very big test of patience. Since part of the fund was invested abroad, this fund saw the Indian decline but also saw the depletion caused by currency devaluation. I would say it would be difficult to be patient with this fund and therefore suggest that you pull out of this fund.

I have taken a ULIP from ICICI Prudential, Life Estate Pension. Should I hold or quit?

ULIP with pension plan is the cheapest among the insurance plans, but compared to other options this is far more costlier. If pension is your goal then I would say you should participate in the New Pension Scheme. Any Indian citizen between the age group of 18-55 years can join the scheme. This is the cheapest of all as well as transparent. And any investor who is investing more than Rs 15,000-20,000 in this scheme will find that it costs the least.

I had invested in Reliance Growth a long time ago and though I have withdrawn a lot, SIPs will still be needed to be paid for 2-3 years. Next, I have chosen two funds: Birla Sun Life Frontline Equity and HDFC Top 200. Please offer your opinion on these two funds along with Growth. Also tell me about one more fund to invest? My horizon is 3-4 years.

Your fund selection is excellent, and you must invest. On a risk-adjusted basis, these funds come in the top quartile of the market. If you have to choose any other fund, then I would suggest UTI Equity or Franklin India Prima Plus, either one can be added to the list.

I have invested for the long-term with Canara Robeco Equity Diversified, Canara Infrastructure, HDFC Infrastructure, HDFC Top 200, Sundaram BNP Paribas Select Focus, Sundaram Midcap, Reliance Growth, UTI Infrastructure, Kotak 30, Birla Sun Life Special Situation Fund and Birla Sun Equity and Franklin Bluechip. In a few of these funds I have invested via SIPs, while for the rest I have made a lump sum payment. I have been investing for 7-to-10 years. Should I keep all of these investments going, or should I get out of some and invest the amount in other funds? Please, offer your opinion.

I think your portfolio is big. Rather than having 12 different funds, its better to have 4 funds from different asset management companies (AMCs) and if your selection is broadly good then so much the better. I think you should get in touch with your investment advisor. And choose 4 good funds and keep investing in them on a regular basis and try to keep the funds of adhering to different investment principles (fund family) so that you can get gains from different styles. Having an over-diversified portfolio would not be good. I think most of the funds you have chosen are good. I think it would be better if you can choose generic funds. I would suggest HDFC Top 200, Sundaram BNP Paribas Select Focus, Birla Sun Life Equity and Kotak 30. These  are among the better choices to build your portfolio.

The markets have not lost ground in any major manor -- just a little bit of profit-booking. Is there nothing to be worried about ahead of the Budget?

It is time for one to be cautious. What has happened in the market over a period of one-and-a-half months is something to be very cautious about. Based on fundamentals I don’t think much has changed except that sentiment has turned around. This kind of a correction on a linear growth curve is in itself good news as it can impart sustainability to the market.

I think there are pockets of exuberance in the market where one witnessed companies with the weakest fundamentals gaining the most in the first round. And they could do so because earlier there was the dominant view that here is a set of companies driven down to a point where bankruptcy threatened them. The recent gains have ensured they will be survivors. To that extent there has been a turnaround in existing valuations. I think the market has gone up very sharply in a very brief period. And after that the markets holding ground at these levels could be a comforting thing.

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World Bank has come with its report that developing countries will grow by 1.5 per cent led by India and China. Of course, it has lowered its forecast for the world economy this year. Do you think this would be positive or negative for markets?

If it turns out to be true then I think it would be a huge problem for India. Because our worst estimates are three times as much (7.09), but you know this is referring to developing economies and on an adjusted basis I think India is expected to be an outlier. Our domestic resilience might get reflected and so far our most conservative estimates have been higher than this. There’s reason to be optimistic and the new Budget will be a heavily anticipated event on which the markets will be banking for growth.

However, there are constraints. There are limits to government functioning and we are getting into a difficult territory. So far, there was a reason to be very optimistic in the absence of a hard number. The market will be evaluating various economic and other factors far more cautiously.

Can you name 2-3 good equity and debt funds?

A good equity fund? I would like to attach a rider. Here is what you need to be careful about. Choose a good equity fund and invest regularly. And if you plan to invest for less than five years, then it could prove dangerous. The course open to you is not to invest a lump sum.

I have referred to a few good equity funds earlier. I will mention them again: HDFC Top 200, Sundaram BNP Paribas Select Focus, Birla Sun Life Equity and Kotak 30.

I want to invest in mutual funds for a 3-to-5 year period. I don’t know anything about funds.

My suggestion to investors like you would be to invest in a balanced fund. I would advice that you look at UTI Balanced Fund, Kotak Balanced Fund or HDFC Prudence Fund. Choose any one of the three and invest in it regularly and resist the temptation of a lump sum investment.

I am recommending a balanced fund because through just one fund you can invest in both equity as well as debt instruments. Therefore, if the market falls then the fall in the fund is not on the same level. And in 3-to-5 years you may cross a few market cycles and that is when the fund does well.

I have invested in Reliance Equity Fund Advantage Growth and ELSS of Reliance. How are they progressing?

Both funds were launched at the peak and they have proven to be average. If you look at Reliance Tax Saver, it’s rated as three star and its returns since launch is just about 9.4 per cent going through a full market cycle, till the end of last month. Similarly, in the case of Reliance Equity Advantage, the fund was also in negative territory till last month-end, barely giving any return since its launch as it is a relatively new fund launched close to the peak. I would say that your selection has so far been average.

What is the current expectation from gold? Since the markets are going up should gold prices come down?

I don’t know, nor can I see the future of gold. What is usually seen is that when there is uncertainty in the market gold prices go upwards. But over the last 5 years, since gold ETFs have been launched, its character has changed.

Earlier, people used to buy gold either in the form of ornaments or in solid form and keep it in the locker. Now people can sell and buy it with much ease. This has led to gold prices being volatile, not because people are buying and selling huge amounts but rather because they are speculating a lot on gold.

So, I think its character has changed because of such high trade in terms of volumes. If the markets maintain their direction in general then I think it will relatively not be appealing. But I don’t know the future outlook of gold.

I have taken the life insurance from the ICICI Prudential Life Assure Policy. Is this good? It has a five-year lock-in rider.

I don’t know much about this. My advice would be that you consult your insurance advisor and also read the policy document carefully.

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