I am 35 years old, with an income of Rs 90,000 per month. Recently I have started investing in mutual funds. I currently invest in Franklin India Bluechip Fund and Fidelity Equity Fund (Rs 2,500 per month in each). My plan is to increase investment to Rs 20,000 per month through SIP, and am thinking of adding HDFC Equity Fund and DSPML Equity Fund. My questions are:
1. I have an impression that mid-cap funds will not be able to maintain their past performance record, hence I am not interested to add them as core holdings in my portfolio, though some investments can be made.
2. Recently, I had taken an LIC policy which acts as risk cover and gives annualised returns of 6 per cent. If I invest the same amount in ELSS for tax savings, will I get better returns? My money will be locked for a lesser period too.
3. Some of my money is lying in bank account which is not utilised for six months to one year. Can you suggest any type of mutual funds which are safe over short term and give better returns than bank account or fixed deposit?
Firstly, your apprehensions regarding mid-cap funds are quite understandable. Mid-cap stocks have a huge upside potential but it is also accompanied by volatility as many of these stocks suffer from lower liquidity. Hence, they can fall more when the equity markets turn sour. However, this does not go without saying that the skill of the fund manager plays a crucial role here. There are funds in the mid-cap domain which have delivered exceptional returns over the long term.
Before deciding whether to invest in a mid-cap fund or not, look at the composition of your overall portfolio. Your existing funds would also be investing in mid-cap stocks and only if you feel that you need more exposure to mid-cap stocks should you decide to go for a pure mid-cap fund. You can also consider funds like HDFC Equity and Franklin India Prima Plus which move across large-caps and mid-caps depending upon the fund manager's outlook. These funds boast of a good long-term performance record and are suitable to be a part of any portfolio as a core holding. However, if you still want to allocate a part of your portfolio to a pure mid-cap fund, then consider funds like Franklin India Prima and Sundaram Select Midcap.
Coming on to your next query, please note that you are committing the common mistake of mixing insurance and investment. You should not look at your insurance as investment. Equity linked savings schemes certainly have the potential to provide you with much higher returns than the annualised 6 per cent of your insurance policy, but not the risk cover which is a more important factor here. The best approach is to first decide how much insurance cover you require keeping the future needs of your dependants in mind and take a term insurance cover of this amount. The remaining surpluses should be invested in other available avenues.
To park your money over a period of six months to one year, you can consider floating rate funds which can deliver better returns than a savings bank account. Do note that the returns or the capital are not assured, but given the instruments where such funds invest, the risk of losing is negligible.