On my retirement, I had purchased Birla Balance and Kothari Balance (now Franklin Templeton India Balance) as safer investments. Now, as the NAV of both schemes have come down, I want to know whether it's proper to switch over to monthly income plans.
N.K. Sharma on e-mail.
You seem to be taking the rule of prudent investing—"constantly monitor your portfolio" seriously. Most investors tend to forget this. At the same time we'd like to point out that while balanced funds are safer in the sense that they offer lower risks and lower rewards, when compared to pure equity funds, they cannot be considered safe in an absolute sense. They usually allocate their corpus between stocks and bonds in the ratio of 60:40. The result of this is that they fall less than a pure equity fund when the stock market falls but also gain less when the market rises. There is no other 'safety' that these funds have.
We will, therefore, not give you a sell recommendation untill you assess your risk tolerance level. Perhaps you've taken more risk through these investments than what you can bear. You should re-examine the financial goals you expect to achieve from these investments. If the goal is long term growth of capital at lower levels of risk then these instruments will serve the purpose. If not then you will have to consider an exit, depending on your requirement.
Monthly Income Plans (MIPs) are on the other side of the risk return spectrum. They invest primarily in bonds with a small (10-15 per cent) exposure to stocks. Though the name implies a payment of a monthly return, these are not guaranteed products. There is no assurance that the fund will deliver a payout on each and every month. And yes, in the short-term you could suffer a capital loss to the extent of up to one per cent. By staying invested over the course of an interest rate cycle, which is for at least a year, this volatility will be ironed out. As equity exposure in these funds will increase over time so will the volatility.
Thus MIPs are a lower risk and with that, lower return product as compared to balanced funds. However, before you act in haste and then repent, why not sit down and assess your investments vis-à-vis your financial goals. This is the most important step and only with this will you be able to take the right decision.
This article was originally published on February 11, 2003.
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