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Towards Goal-Based Investments

Your portfolio should not be governed by market movements, but by asset allocation

Captain Chandra, 52, is a pilot. He has some surplus money that he plans to invest in monthly income plans (MIP) with a 8-to-10-year timeframe. He wants the dividend from this investment to be swept into equity schemes. He also wants his monthly investments to be funnelled as SIPs in equity funds. However, he thinks that the markets are too expensive right now to invest.

His mutual fund investments via SIPs:

1.    DSPML T.I.G.E.R.: Rs 5,000 p.m.
2.    DSPML World Gold Fund   Rs 5,000 p.m.
3.    Sundaram Select Midcap: Rs 5,000 p.m.

We tailor an investment strategy to suit his needs.

Instead of shaping your investment decisions according to the market movements, your fund selection should be governed by the asset allocation that you are looking at. You should identify the financial goals that you have to achieve and adjust the asset allocation accordingly.

One common principle should govern your investments in equities – keep only that money which is not meant to be used in the foreseeable future in equities. This will ensure that when the time comes for you to withdraw the money, you are not forced to do so when the markets have been on a punitive decline.

At your age, retirement is not far off and accumulating for this should be your first priority. However, if your have other financial goals as well, your investments should be structured in a manner that these are achieved too.

You currently plan to invest a lump-sum in MIPs, which invest about 80-90 per cent of their portfolio in debt, and then subsequently invest in equities only. This will cause your equity allocation to rise in the future. If your investments have accumulated to levels at which all your goals will be met, new investments can be directed to equities.

For example, let us assume that you plan to retire at 60 and seek an inflation-adjusted income of Rs 1 lakh per month thereafter. Then with a return of 10 per cent on your investments and an annual inflation rate of 6 per cent, you need about Rs 2.2 crore by the time you retire. However, if you have already accumulated this corpus, your subsequent investments can surely be directed towards equities.

Once you decide on the asset allocation, you need to choose the investment option that will turn out to be the most tax-efficient.

You’re MIP-based investment plan ensures that you get the debt fund treatment (these funds invest about 10-20 per cent in equities and the rest in fixed income instruments). For tax purposes, they will be treated as debt funds. But here, the income that accrues from the equity portion of the fund will also be taxed as per debt rules, losing out on the tax advantage.


Check the taxes
Taxation    STCG    LTCG    DDT
Equity / Balanced Funds   15%   Tax-free   Tax-free
Medium Term Debt / MIP Funds   as per tax slab   10% (20% with indexation)   14.16%


We suggest that you include balanced funds instead of equity funds and MIPs in your portfolio. They invest more than 65 per cent of their assets in equities and the rest is invested in debt. These funds are treated as equity funds for taxation purposes. Even the returns from the debt component will be treated at par with those from equities. This will be more tax-efficient as compared to pure equity and debt funds.

The following table shows how balanced funds will score better on the taxation side as compared with MIPs and debt funds.

Equities from balanced funds
Balanced funds typically maintain about 70 per cent of their assets in equities. The following table shows how the investments can be allocated to balanced funds and debt funds to get the required asset allocation.


Asset Allocation
Required Debt (as % of total portfolio)    Balanced Fund (%)    Debt Fund (%)
80   29   71
70   43   57
60   57   43
50   71   29
40   86   14


However, do not have all the debt exposure through balanced funds. Having some portion in pure debt funds is helpful in rebalancing. Also, if your targeted allocation to equities is less than 40 per cent, we suggest that you also include pure equity funds.

Go the systematic way
When investing in equities, the best way to do it is to invest systematically. When investing in the balanced fund, first invest in a debt fund, and then gradually shift to the balanced funds.

Your fund selection has not been bad. But for reasons discussed above, you may consider replacing some of your equity funds with the balanced funds.

If you have already accumulated for your goals, you may go ahead with your subsequent investments into the aggressive funds that you own. We believe that you would still want the returns from this investment to be stable. Hence, a single fund or sector should not account for much of the portfolio. Thematic funds are good only as a small percentage of your portfolio.

DSPBR World Gold Fund is a different fund that you can take a look at, but be mindful of the additional risk of currency exchange rates that you would be assuming through them.


Suggested Portfolio
Category    Choices    
2 / 3 Balanced Funds   Canara Robeco Balanced, DSPBR Balanced, HDFC Prudence
1 / 2 Debt Fund(s)   Reliance Short-term, UTI Short Term Income Fund
Diversified Equity Funds (if required)   ICICI Prudential Dynamic, Reliance Regular Savings Equity
Aggressive Equity Funds (if required)   Reliance Growth, Sundaram BNP Paribas Select Mid cap
Tax-planning Funds   Fidelity Tax Advantage, Magnum Taxgain