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My father is due to retire soon. He has income from other sources to meet his daily expenses. He wants to invest Rs 50 lakh in equity funds for more than 5 years. Please suggest a portfolio of funds?
-Subham Gupta

My father is 60 years old and is due to retire. He will receive Rs 70 lakh on retirement. He owns a house and has income from other sources to meet his daily expenses. He wants to invest 50 lakh in dividend reinvestment plans of mutual funds. His time horizon is more than five years and he is comfortable investing in pure equity funds. Since the market is at an all time high I have been advised to put the money in Monthly Income Plans (MIP) of various fund houses with a systematic transfer plan (STP) instruction in the equity schemes of that fund house, so that all money is invested within six months to avoid market timing. This will entail considerable cost in form of entry and exit loads. Is there a better way to do this? Could you suggest a portfolio of funds? I know that your 5-star rated funds are the best but I read that a fund which performs very well in one year tends to give low returns the next year.
Also I have come to know that there are certain funds which invest in other funds, keeping track of the performance of these funds. Please let me know pros and cons of investing in them.
-Subham Gupta

We are glad that you have imbibed the importance of systematic investing and in doing so have avoided the trap of timing the market. A time period of more than five years is also appropriate for an equity-oriented portfolio. While your strategy of taking the STP route is fine, MIPs may not be the best instrument for this. We would recommend that you stick to a short-term debt fund through which you can route investments to equities. Reason being, MIPs maintain an equity exposure of anywhere between 15-25 per cent of their assets under management. By investing a lump sum amount in such an instrument, the whole purpose of investing systematically will be defeated. Further, short-term debt funds do not carry any entry or exit loads. As far as the process of fund selection is concerned, there are many variables beyond past performance that you must look at. It is also true that past performance of mutual funds does not guarantee future performance. However, to generalise that funds perform well in alternate years is preposterous and devoid of any logic. There is also no past trend in mutual funds' performance to suggest such a phenomenon.

Maintain a portfolio of around four core holdings of diversified equity funds. You should target a predominantly large-cap, growth-oriented portfolio. For achieving this, the first step would be to educate oneself about each fund's objective. By doing so you will be able to decipher whether the fund has a capitalisation or sector bias. The star rating will give you a comprehensive assessment of the funds. You can further refer to the 'analysis' section on the website or the 'analyst pick' section of this magazine to know more about the investment style of funds.

Fund of funds (FoF) - funds that invest via other funds - is another good option for those who don't want to research funds on their own. However, investing through these funds can be tricky. Some of these funds only invest in the equity schemes of their fund house.

If you plan to invest in FoFs, choose only one FoF. An FoF spreads its investment across at least 5-7 funds. Therefore, just one FoF will provide you with adequate diversification. Else a portfolio of four core equity funds will suffice.



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