I am a 31-year-old self-employed person. I have two young children. I had been investing every month via SIP in the growth option of Franklin India Bluechip and HDFC Equity in my children's name since April 2003. I intend to continue my investment for the next 15 years. This investment is being done for their education, marriage, etc. Am I on the right track?
We are pleased to see you harnessing the power of equity for long-term capital gains. Over the long-term, equities deliver highest returns relative to all other asset classes. Since you are investing for your kids, you too have a very long investment horizon. And that's just the way it should be - investing horizon matching that of the asset class. The fund selection is also good. Both Franklin India Bluechip and HDFC Equity have a strong long-term performance record. And since you are planning to invest regularly in both these schemes through SIP, you will also be able to benefit from the rupee cost averaging. Your investments will be spread across time and not tied to any particular level of the market. Even if each investment is small, over time the power of compounding can transform this into a significant amount. But remember that when you are nearing your financial goals (two years before the goals), you should start booking profits at regular intervals and invest such money in debt instruments like a bank fixed deposit. This will ensure that when you actually need the money, you will not be subjected to the uncertainty of the market.
Saving Is Essential
I'm 28 and for the past three months I have been saving Rs 6,000 per month and right now have an accumulated balance of Rs 18,000 in my savings bank account. I have six months now to get married. Please suggest some better way of investing so as to reap maximum benefit. I'm ready to chance my luck in the equity market. I don't have more than six months. Please advise.
Well it seems like the only reason you are currently saving is for your marriage and you have already made up your mind that your savings habit is going to come to an end with your marriage. This in fact is quite contrary to what we believe should be the case. Your marriage signals the start of a new phase in your life and soon enough there could be a possible expansion in your family. What all this means is that the saving habit that you have inculcated should be maintained for the rest of your earning life.
Now as far as your question is concerned one thing you have to understand is that there is no magic wand for investing which will enable you to generate extraordinary returns. In our opinion, liquidity and safety of capital should be a priority for you, and therefore we would strongly advise to avoid investing in equities, and rather keep this money in your bank account. If you are serious about investing in the equity markets then you have to think long-term. You can allocate a certain part of your money to diversified equity funds and forget about it for a few years. Of course you must choose the fund judiciously (you can use the Fund Scorecard as a guide for the purpose).
What are the kinds of bond funds that are available?
There are various types of bond funds that suit the needs of investors having different investment horizons. Firstly, there are ultra short-term or the liquid bond funds, which are suitable for those who want to park surplus money for a very short duration, ranging from a few weeks to about a quarter. Here the prime concern is to keep the capital intact. Next are short-term funds, which invest in debt securities of short maturity. These funds would be suitable for investment horizon of around a year or so. Since these funds hold securities with a short maturity profile, they are less affected by the changes in the interest rates, and hence the risk of loss is lower. A relatively new category of debt funds are floating rate funds, which invest primarily in securities carrying a floating rate coupon. The rate of interest offered by these securities keeps changing with their chosen benchmark rate. These funds are suitable in times of uncertainty. When the movement of interest rates becomes difficult to predict, these funds are a good option to park your money in. For investment over a longer horizon, there are medium term debt funds. This category has the potential to generate better returns than the categories mentioned above.
However, this category is also the most susceptible to adverse interest rate movements, and hence prone to more downside risk. While the above mentioned types of debt funds are free to invest in various types of securities ranging from corporate bonds, commercial papers to gilt securities, there are also funds that are mandated to invest only in government securities. Such funds are categorized as short-term, and medium to long-term gilt funds.
Since gilt securities carry the backing of government of India, they are free from credit risk. However, please remember that if the interest rates in the economy rise, then gilt securities can be the worst hit.