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Since banks' FDs have become unattractive on account of low returns, investing in MF seems to be the best bet. Is it okay to invest about Rs 1 lakh now in Tata MIP, UTI Petro, Magnum Pharma and HDFC Prudence?

Since banks' FDs have become unattractive on account of low returns, investing in mutual funds seems to be the best bet. I am new to this area but the Mutual Fund Insight has really helped me. Is it okay to invest about Rs 1 lakh now in Tata MIP, UTI Petro, Magnum Pharma and HDFC Prudence? I am looking at about 18 per cent returns a year for the next three years.
Shailesh Bhagat

One of the questions you have asked relates to when is the best time to invest in markets. Well nobody can predict where the markets will go tomorrow. But your investment goal is well defined.

If you want to beat the inflation over the long-term and generate returns substantially greater than what is achievable through debt instruments, then equity (or equity funds) is where you should park your nest egg.

When we say that equities have the best potential to outperform, we are referring to diversified equity funds. Thus, before you commit to equity funds, it is essential to keep in mind that the core of your portfolio should consist of diversified equity funds. A diversified fund gives the fund manager the opportunity to run away from sectors, which are in trouble and invest where there are better opportunities for capital growth.

UTI Petro and Magnum Pharma are sector funds. As their names suggest, the former invests in petroleum sector and the latter invests in pharmaceutical stocks. These funds can be used to top up your portfolio if it is deficient in these sectors or you have strong views on these industries. Such sector funds represent the highest risk-return potential in the mutual fund universe and are not advisable for a beginner. Tata MIP is a monthly income plan. This scheme invests predominantly in debt instruments and has a small exposure to equities. This type of fund is advisable for investors who want to add a small boost to pure debt exposure.

HDFC Prudence invests 60 per cent in equities and the rest in debt. This type of fund is less risky than a pure equity fund and could be a suitable entry vehicle for the new investors. But before taking the plunge, we would suggest that you first sit down and make up your mind on what your investment objectives are. If you are looking for capital appreciation, equity funds are the funds of choice. But be prepared to stick it out for the long-term (three-five years). If you are looking for capital preservation, debt funds will serve you better.

And on a parting note it would be very important for you to realise that there are no assured returns in the mutual fund world. While you may seek 18 per cent returns a year over the next three years and equities are fully capable of delivering them, there is no guarantee that this target will be met at a time of your choosing.



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