I am 40-year old and would like to invest around Rs 20,000 monthly for the next five years. I have already invested in HDFC Prudence and HDFC 200 (equity scheme) where my total investment is about three lakh. This money was invested some time back and I had to discontinue the same due to some financial emergency. Please guide me to allocate the Rs 20,000. Though I feel I could look at the same schemes again.
-Biju Kurup
A key principle of building an investment portfolio is diversification. Mutual fund is a convenient way to do this quickly. And a truly diversified investment portfolio should include stocks from varied scale and sectors managed by different managers.
HDFC Prudence and HDFC Top 200 are good funds in their respective categories but managed by the same fund manager. And 42 per cent of his investment is common across both funds, as on December 31, 2012.
Five year period may not be enough to expect inflation and fixed income beating returns from equities. To validate this, we checked the return from a five-year SIP in HDFC Top 200. Across time period, the 5-year SIP delivered a handsome return. But in the first quarter of 2009, one would have merely got one per cent return. Even in HDFC Balanced, the worth of investment after five-year of SIP was less than SIP contributions on two days in the first quarter of 2009.
Suggestion to Biju Kurup
Invest through SIP and consider two balanced funds for a five year term. Balanced funds are more stable than an all equity fund and better suited for 5-year investment tenure. SIP works, almost always. It certainly helps you avoid catching a market peak.
Balanced funds typically have 70:30 allocation to equity and debt. The 30 per cent allocation to debt provides stability to the portfolio. They are also valuable for periodic rebalancing. They are treated as equity fund from a tax perspective, hence all gains from a balanced fund is tax-free.
This article was originally published on February 07, 2013.
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