I am interested in investing about Rs 30,000 in diversified equity funds. I am thinking of choosing from HSBC Equity, Franklin India Bluechip, Templeton India Growth, Franklin India Prima, HDFC Equity and Franklin India Prima Plus. My aim is to earn around 20 to 25 per cent profit in about six months. Please suggest if this target is realistic or do I need a change.
Let's first brush-up your understanding of mutual fund investing. Mutual funds are subject to market risk and there is no assurance or guarantee that the fund's objective will be met. Moreover, past performance of a scheme do not indicate its future performance. These two lines are always written on the offer document as risk factors, but are usually ignored by investors.
You seem to have overjoyed by the equity fund's performance in 2003 and want to take a short-term call on equity funds. But your target of achieving a 20 to 25 per cent growth in six months is more of a speculation than an investment. Since the future in uncertain, no one knows where the equity market will be in six months or say, two years from now. But history suggests that equities have proved to be a good investment avenue over the long-term. By long-term, we mean three to five years. This will help you ride over the intermittent volatility with ease and thus end up with a decent return on the investment.
Though all equity funds mentioned by you are good ones, but the problem is your time horizon. Six months is too short a period for taking a call on equity funds. It may happen that your target is met in six months, but the certainty of achieving this goal is like that in playing a card game or betting on horseraces. Consider this - in the past 10 years, even one of the best equity funds like Franklin India Bluchip's 6-month return has been negative 42 per cent of time. And the fund has given over 20 per cent return (in the 6-month period) on 33 per cent of time.
But over five years, the down side risk is reduced to 0.6 per cent of time and the fund has delivered an annualised return of over 10 per cent on more than half the time. Though these figures are based on the historical performance, but it definitely gives us an idea about how equities perform over the long-term. Thus, we would suggest you to become realistic by elongating your investment horizon.