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All wise investors should have a 0% allocation to new funds and all other kind of investors should have only new funds

Dhirendra Kumar, CEO of Value Research believes that an investor should stay away from investing in new funds. He further added that, “an investor investing for a span of 15 years should invest only in diversified equity, choose one-two funds, invest Rs 2,500 each in the two funds, review these investments every 12 months and continue doing so.”

Excerpts from CNBC-TV18's exclusive interview with Dhirendra Kumar:

Given the market condition we are in, mutual fund is looking at a long-term time horizon. But do you think 15 years is a fair time horizon to look at? Should an investor trim it down slightly? What about the investment that he is looking to make per month, is Rs 5,000 okay? What fund would you advise?

Considering a time span of 15 years, one should only think of diversified equity; an investor should not get tactical and not become a fund collector. An investor should not consider sector funds and he should be disciplined to review his investment every year. He should choose one-two funds, invest Rs 2,500 each in the two funds, review these investments every 12 months and continue doing it. The investor can accumulate substantial wealth through this investment. I assume that his Rs 5,000 will grow as his income growth rises over time. He should choose an equity fund with good history over the past five-seven years.

Which one would you recommend?

The investor should choose one-two from funds such as DSP Merrill Lynch Equity, Franklin Prima Plus, Kotak 30 or HDFC Top 200, and invest regularly.

What is the kind of rational return he can expect on his investment over a period of five years?

A reasonable expectation should be a premium to the fixed income return that we get, which is also pretty high because at present we get about 10%. However, in the past 10 years, if anybody would have invested Rs 10,000, his investment worth will be in the region of Rs 60-70 lakhs. So, for his Rs 5,000 instead of Rs 10,000, it will be half as much. This way you are able to accumulate something sizeable with such a small but regular investment.

What are the prospects of Franklin India High Growth Fund?

It is a relatively new fund launched in June 2007, and it is heavily into mid and small-cap and about 40-50% is in the large-cap. This fund has lost all its initial gains it made till January. The fund managers also, though of the Franklin family, are not the same ones as managing some of the more mature older funds. So I am quite apprehensive about the fund; however, it is too early to say that it is a bad or a good fund. It has just seen one cycle of the market in the past one year and it is already down about 15-18%. I think it makes sense to hold on.

A lot of viewers always get into this buzz of getting into a new fund offer since they presume that it is priced at Rs 10. So it is practically a cheaper fund that they are buying rather than getting into a blue chip fund which is probably quoting in three-digits or maybe a high two-digit number. When one should invest in a new fund? Or does it always make sense to go in for a well established fund which has probably seen two-three market cycles or has given substantial returns over the period of three-five years?

Absolutely, there are different methods to adopt when it comes to choosing a mutual fund. As far as equity is concerned, what you are saying is the only and perfect way to go about choosing a fund. Unless one comes across an opportunity that may not necessarily be a mainstream, but such funds cannot be a core of one’s portfolio.

When it comes to choosing a Fixed Maturity Plan (FMP), it is not possible to buy an old FMP. One can only buy an FMP without a history because it is almost like a closed-end offering which you buy. So when it comes to equity, investors are always better off choosing a fund with history. Investing in equity is a call on the market. So the future of a new fund or even an existing fund is uncertain. But one can still gauge something about a fund for an existing fund with some history. In a new fund, the market as well as fund characters are unknown. So, I would always urge investors to keep away from new funds unless there is a great idea, which has been made available for the first time.

So as a percentage of total portfolios, how much should new fund offers be as far as the equity mutual fund portfolio is concerned?

All wise investors should have a 0% allocation to new funds and all other kind of investors should have only new funds.

Can an investor stay invested in Reliance Growth Fund, HDFC Equity, SBI Magnum Contra Fund, DSP Balanced Fund and Reliance Vision Fund?

All these funds are good, except for Reliance Vision Fund, which is sluggish but it is also not bad. In the declining market, everything falls. Good funds can not avoid steep market fall. But your fund selection is good. It is very important for someone like you who is investing for the long run, to keep investing in the down-market. Ideally for you, the market should remain depressed and in a very bad shape and should go up only when it is time for you to pull out.

It has been very unnerving for most investors since January; the market value has been going down on a continuous basis. But I think for somebody like him, who is investing regularly and investing for a few years, it is very important that he should be choosing good funds, which he has done. He should be investing regularly in this kind of market and should hope that the market will be very well placed when he plans to take his money out. I am very hopeful that over next four-five years he will get some good opportunity to get out at a substantial value.

He should be holding out for a period of seven-ten years and maybe look at two market cycles, one bear and one bull market?

Certainly. Three-five years and beyond is desirable and he should not try and time his fund selection; rather, try to chase any fund which has done very well in the recent past. He should not go about accumulating too many funds here.

The investor has two funds from the Reliance stable, that is Reliance Growth Fund and Reliance Vision Fund, amongst his total holding of five. Should he be exiting one of those funds or maybe continue with both of them?

If I have to choose between the two funds, Reliance Vision Fund and Reliance Growth Fund, I will sell Reliance Vision and retain only Reliance Growth to replace it with any other good equity diversified fund of any other fund family, which he does not own.

Which Gold ETF (Exchange Traded Fund) one can invest in?

For investing in an ETF, one needs to open a demat account; for mutual funds one does not require that. It is a mutual fund but unlike most other mutual funds, when one invests his money in a mutual fund, the mutual fund company or the fund manager buys many stocks or many bonds or makes multiple investments to get diversity.

Here is something wherein you give your money to a fund manager and the fund manager buys gold only from certain place and keeps it at a certain place which is mandated by the law. So it is the only investment made by the fund company and the NAV of the fund that one owns, moves in line with the market price of the gold; less the expenses. So in that sense all gold ETFs are equal; they just do as well or as bad as any other. So fund selection of ETF is not important.

What if the investor wants to invest for more than ten years, does it make sense then to calculate perhaps how much gold he wants to buy and then invest an equal amount spread over ten years into a gold ETF?

That could be one approach if he is trying to hedge the price of gold; I am confident that over the next ten years, if one goes by the cyclicality of commodity prices and the long-term history of gold as an asset class, the investor will be much better off investing his money in an equity fund. Ten years later he can take his accumulation out and buy much more gold than what he will be able to accumulate by way of gold ETF because equity proves to be the best performing asset class over this kind of time horizon. So, given his investment approach and his need I do not think he needs to buy gold ETF. However, if he wants to buy gold ETF there is no harm because he will be able to substitute his investment with exact amount of gold ten years from now, and he can do regular investing. But thinking logically, he should look at equity as a long-term asset class and gold should be looked only as an opportunistic short-term avenue which is in the middle of a bad time.

What would be the future of gold? If the investor has sold 1 kg of gold on MCX (Multi-commodity Exchange of India) at Rs 11,400 per 10 gram, should one cover one’s shorts in it?

I think the investor is a smart gambler and I do not have any special advise for him because these things need a different instinct. I do not know what will be the future of gold in next 10-15 days but if the investor has shortened his positions; he must be gaining profits right now.