I am 35 years old and have a salary of Rs 7,000. I made my first mutual fund investment recently, by investing Rs 50,000 from my savings (Pru ICICI Power - 30, 000 + Pru ICICI Dynamic - 10, 000 + Franklin India Bluechip - 10, 000). Seeing the gains this investment has made (Rs 13,000 in just eight months), my father wants me to invest Rs 1 lakh of his savings into mutual funds. He's a 64-year old retiree with a monthly pension of Rs 8,000. I would like him to get some good returns over the next two years in a safe (not safer or safest) manner. Please advise.
—Rajesh Kannan
You certainly have reasons to cheer the capital appreciation that you've earned, but do not except such returns going forward.
You have been one of the blessed ones to have entered the market just at the right time to cash-in upon the bull-run that has taken Indian stock markets to their all-time highs. But remember that equity markets go through bearish phases as well during which the funds may deliver negative returns for a number of months at a stretch.
And unfortunately, nobody can predict the bullish and bearish phases with certainty. The only way out in such a case is to invest in a disciplined way, without bothering about the short-term fluctuations that keep happening now and then.
You have some good funds in your portfolio. Two of your funds-Prudential ICICI Power and Franklin India Bluechip are equity diversified funds. Although Prudential ICICI Dynamic is a hybrid fund, but presently all its investments are in equities, thus making your portfolio an all-equity one. Given your age, you can take high exposure to equities, but having some portion of the portfolio in debt is always recommended. Consider adding some good balanced fund to your portfolio.
As far as the investments of your father are concerned, you should limit his exposure to equities. You can consider some good debt medium term funds like Reliance Income.
To provide for some equity exposure, go for a good balanced fund like HDFC Prudence which will provide the benefit of higher returns from equities combined with the stability of debt, which is much needed at his age.
You can even choose a good Monthly Income Plan which allocates not more than 20 per cent of its portfolio to equities while investing the remaining part in debt. These categories of funds are also conducive to the time frame stated by you, because given his age, a two-year horizon might prove to be relatively short for an all-equity fund, and hence more risky.
Please do not try to chase the kind of returns that your investments have generated in the last eight months. Remember that a portfolio of debt and balanced funds will not provide him with similar returns, but this will be a well-suited portfolio given the risk considerations.
It will be recommended not to invest the entire Rs 1 Lakh together. You should go through the Systematic Investment mode, where you invest a certain sum at regular intervals, say monthly or quarterly. In fact, this holds true for all investments. Rather than investing in lump sum, you should always invest small amounts regularly.
This article was originally published on April 29, 2005.
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