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Caught On Peaks

Investing in a fund when it is at a peak can be counter-productive

I was advised in January, 2008 to invest in DSPBR Small and MidCap, Fidelity Special Situations, Franklin High Growth Companies and Reliance Equity Advantage Fund. All these funds are not doing good. What should I do?

You have actually caught these four funds at their peak and some of this may have led to disappointing results. All the four funds are very aggressive and they certainly carry more risks. Idea is to spread risk by not investing in a lump-sum at one time. You should rather spread out your investment over a long time period by investing consistently. That way you could have avoided getting very badly caught when the markets were at their all-time highs.

There are three options in a mutual fund, one is the growth option, dividend pay out and dividend re-investment. I understand the difference. What is a good option for long term investment?

There is not much of a difference if you are investing for the long term. The Direct Tax Code makes it completely independent. The plans may not be relevant anymore after 2011 when the new tax code comes into play. There are two-three situations that can be played out here: If it is a long-term investment, it does not matter if it is a holding stretched over one year. In case you need to pull out money before one year and in between the fund has given some dividend, your capital value goes down. In case at the same time, you don’t require the money for immediate consumption get your dividend re-invested. So, to that extent, your capital comes down in value and you are liable for slightly lower taxes. It is able to suppress you short term capital gains.

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