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I am about 28 years of age and new to mutual funds. Based on some preliminary knowledge, I have decided not to invest in any technology fund (since I work in the software sector). I have low liabilities and can take a moderate risk. As such, I am thinking of investing in HDFC MF Monthly Income Fund (growth option) which has 25 per cent equity exposure. That apart, I am thinking of investing in ICICI Pru Dynamic Plan (which can swap between equity and debt as per market conditions). Am I on the right path? How should I allocate my portfolio between debt, equity and across funds? I am thinking of investing every month.
Rajasekhar
Your moderate risk profile is contradictory to your desire of investing in a monthly income plan. Even the most aggressive monthly income plans can invest no more than 25 per cent of their assets in equities. If you can take moderate risk, a balanced fund will suit your investment needs. These schemes normally invest 60 per cent of their assets in equities and the remaining in debt. Regular rebalancing by the fund keeps the distribution between these two asset classes pegged at this level. Because mutual funds are not taxed on their transactions, this becomes a tax efficient way to maintain a steady asset allocation.
A systematic investment plan in a balanced fund of your choice will help you in spreading your investment across time. This should help in ensuring that all your investment is not tied to a particular level at which the market was at some point.
Your other choice-Prudential ICICI Dynamic Plan-is even less advisable than an MIP. First of all as these funds can rapidly switch between equity and debt, it will be really a tough job to maintain your asset allocation. Further, you will have to be very confident on the ability of the fund manager to time the market. We do not believe that successful timing of the market is possible on a consistent basis. Investors should not try this and for that matter fund managers also.
This article was originally published on February 12, 2004.
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