I am just starting to invest in mutual funds. I plan to put in around Rs 2,000 a month through SIP. I have a few questions: Should I invest the entire Rs 2,000 in one fund or Rs 500 each in best four funds? How should I distribute this between equity, balanced and debt funds? I am looking forward to overall return of 20-25 per cent.
-Chetan Hinduja
Before deciding upon the number of funds, first decide how much you would like to invest in debt and equities. Equities have proved to be the most profitable asset class over the years. But they also happen to be the most volatile, particularly over a short term horizon. Therefore, investment meant for an year or so, should better be directed primarily towards debt instruments, with a limited exposure to equities. However, if you plan to invest for long-term, then the practice of investing regularly in an equity dominated portfolio should prove quite rewarding.
And as the stage when you would be withdrawing your investments nears, start shifting your money towards debt-oriented funds gradually, to prevent any unpleasant surprise that the equity markets might throw up at the last minute. Read this issue's cover story for a detailed discussion.
If you decide for an all-equity portfolio, then a couple of good diversified equity funds will do for you. However, while choosing funds for yourself, we would advice you to avoid funds with a very narrow investment objective, like sectoral funds, or funds based upon a specific theme.
Since this will be your first investment, invest in funds which are flexible enough to invest across market capitalization, and are not restricted to any particular sector or investment strategy. Such funds will be suitable to form the core of your portfolio over a long-term horizon. A fund like HDFC Equity, or Franklin India Prima Plus will be a good starting point for you. However, if you are not comfortable with an all-equity portfolio, then a good balanced fund will be suitable, as it will provide you with diversification across the asset classes in a simple manner.
An annualized return of 20-25 per cent looks quite ambitious, although not impossible to achieve, if the past performance of some of the funds is anything to go by. To achieve a high rate of return, you will have to invest heavily in equities, and also bear with the ups and downs that equity markets may witness in times to come. But please stay away from making some investment blunders in a bid to make huge profits quickly.
This article was originally published on November 11, 2005.
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