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Benefits Compared To Risk

Dhirendra Kumar replies to his listeners on AIR, while they clarify their doubt and take his suggestion

Dhirendra Kumar, CEO, Value Research said that, the biggest question right now would be - is this Bear Market rally? Are the commodity prices going up because of demand or is it some sort of speculation?

Excerpts from AIR's exclusive Market Mantra with Dhirendra Kumar:

I have two smart kit policy of ICICI, now what are the chances of growth for it?
This smart kit policy is a ULIP policy and when you invest in this you are accumulating wealth for your child's education and it's a bit expensive. In this market the performance all the ULIP depends when you have invested the money and what are the riders of the policy. Compared to a mutual fund policy ULIP policy can be customized as per your need. And its pricing also changes along with your age. So in this case you need to understand the policy document properly. So I would suggest that you sit with your investment advisor and understand your policy properly.

I would like to invest Rs 1,000 per month, can you tell me which are good funds and are they tax free?
There are tax saving funds also, these funds invest in equity market. There is a lock-in period of three years with this fund. Some of the good funds would be SBI Magnum Taxgain, Franklin Tax-shield, Canara Robecco Tax fund or HDFC Tax saver. You can choose any one of these and then invest in them on a monthly basis. One thing that is important is that you must invest in them with a horizon of more than three years.

There are so many companies who have of-late started FD (fixed deposits) schemes like Tata Motors, CNBC etc. Now how reliable are these FDs compared to a FD in Bank? Or is better to do FDs with companies which pay higher interest rate?
Both FDs are different. Although both the FDs - be it at the bank or the one with the company are unsecured. But the way Bank FDs are linked with your account, it provides satisfaction, since you can write a cheque against it. And as far reliability is concerned then there is no insecurity or uncertainty with the bank. Till now no one has had a disappointing experience with the back. As far as company FDs are concerned, invest only with such company about whom you are sure. If there is even a small doubt then don't invest in such companies. The money put up with the company FD will get you higher return but there is a risk attached tot it i.e. the FDs is unsecured. Do look at the credit rating of the company. The money put up with the company is not as liquid as the banks. If these two things are fine with you then just check the credit rating and invest with the company. If some company offers excess return then it could be a dangerous proposition and therefore it should be avoided.

I had taken two SIP of Magnum global growth from SBI. Next year in March, three years will be completed. Should I continue with it, how will it perform in the future?
This is a risky fund and around 2006-07 it gave dazzling performance, around the time when you had started investing. It gave a return of one and half times more than the market around that period. If your investment horizon is long then I would suggest that you continue investing in it. Don't keep high hopes with the fund in the short term. If you can spare the money then keep investing through SIP, this type of fund will give extraordinary performance when the market is in full momentum again. Midcap Global is a midcap fund. Only when the market sustains its rally does midcap perform.

This sub prime mortgage crisis that had started in America and is still continuing, so when will we get out of this whole mess? Now that copper prices and crude oil prices are back to decent level will they remain here or should we expect them to rise again?
Its tough and extremely difficult to say till when will these recessionary trends exist. But I don't think we have been affected by it as much. If anything has happened, then it is that FIIs who were investing in India started withdrawing from the market. Now there are those who are returning and to some extent things will improve in India. Will we get back to where we were earlier is something extremely difficult to say. Market is always cyclical in nature. After seeing the market increase continuously for the past five to seven years, it was disappointing to see the market fall and it was quite shocking. I don't think now the situation is as dangerous now as it was before where every new day the market would fall to new lows. Now we have managed to come above it.

The biggest question right now would be - is this bear market rally? Is the commodity prices going up because of demand or is it some sort of speculation? To answers these is extremely difficult and I think most of the experts are just guessing. The key issue here is if this is a permanent turnaround or if it is a bear market rally.

I want to invest in a fund that has no connection with the stock market. And I intend to invest for a period of 10-15 years on a monthly basis. Can you suggest me something?
There are fixed income funds; also you can invest in bond or gold fund. And despite being in for the long-term don't keep high hopes of high returns. If you are ready to invest for the long term like 10-20 years then I wouldn't suggest you to reconsider your decision. To invest in stock market for a short duration is very dangerous. But if you plan to invest for 10-20 years continuously then I would suggests that you choose a good equity fund and then invest in it. Even when the market falls keep investing, the reward for this will be substantially high. Although the way the market has moved in the last one year has shattered the faith of many in the stock market. Fundamentally I think that equity has always given better returns over a period of 10-20 years.

For someone who is investing why not buy stocks directly since the time horizon is like 15-20 years?
Well it will be a tough work to keep up with active management, and when one is investing only Rs 1 thousand per month then following up companies and calculating and investing. It will not be an easy task. Rather investing through the mutual fund is a very compelling idea.

Can you suggest some debt mutual fund that would give decent returns in the long run? From 1992 to 2002 the market had hovered around 2000-3000, so sometimes it would be a good idea to invest in debt funds besides equity funds. For the said reason if possible then suggest some debt fund that has performed well over the long haul.
Debt fund is relatively the dull part of the market. Not much questions are asked on debt funds and the reason I understand is that the Fixed Deposits and NSC savings are so rewarding that one need not get into debt funds at all. Now the difference between the returns of fixed deposits and the debt mutual funds is negligible.

Although fixed income funds will be rewarding because they are extremely tax efficient. If you would compare the tax treatment of fixed income funds to that of bonds and deposits then it fares better for all income brackets. Debt funds have the image that you will not have any loss although if you look at it then after a certain gap of time one always incurs loss in debt funds. Debt funds pass on the loss that they suffer because of change in interest rate. The fall in bond prices, that affects the NAV of the fund, to this a general investor has not reconciled as yet.

But in the coming days based on the way interest rates are falling. In that case debt fund will give far better returns than the bank deposit. And if you look at the post tax then the returns will be 20-30 percent more than what the banks offer.

I would like to invest in fund which gives me huge profits; I am ready to take risk to some extent for this? My time horizon is three years.
It's important to know that you are ready to take such high risk for excellent returns. Be prepared that if you loose out money then don't get unhappy. There are around 12 aggressive funds in the market. Like DSP Black Rock Opportunity fund, Sundaram Select Focus Fund, Religare Agile fund; these are concentrated fund which see extreme reactions when compared to the market. In such volatility, these types of fund can be extremely rewarding in a short run. Now I have a suggestion for all those who would want to invest in such a fund. Before you start investing, prepare a target and stick to it. Withdraw the money when you have achieved the target because your goal is to achieve aggressive returns in short term. And make sure to have a loss expectation also. If you have lost the money then do not incur it further and get out of the fund.

This is a hypothetical question. Supposedly if I invest in income fund some Rs 10-15 lakh tomorrow. And day after the RBI decides to drop the interest by 1 per cent. Now in such a case will I be a gainer or a loser?
You can be either. I will tell you why, for the past 10 days the market is anticipating that there could be a rate-cut. If you look at the 10 year GOI yield then it has flipped from 7 per cent to 6.4 per cent in the past six days. Last week all the yields for the fixed income the 10 year GOI yield has slipped by nearly 30-40 points, which I think is phenomenal. There have been instances where the market has anticipated it and it has been reflected in the NAVs or the valuations in the past. And the actual event may not translate it into a bonanza. My view is that one per cent cut in the rates could actually accelerate the decline in the yield trend.

I wanted to ask if the dividend from the mutual fund is taxable and do we have to show it in our income tax return?
The entire dividend from all mutual funds is tax free. The dividend from the fixed income fund is tax free as a Dividend Distribution Tax is deducted earlier itself and therefore the dividend is 10 per cent less than the NAV. It is announced when the dividend is given to you that the DDT has been deducted. The entire dividend from the equity funds are tax free. And since this whole income is tax free, you must show it in the income tax return.