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I am a retired pensioner, aged 63, earning a total income of Rs 1.95 lakh per year from pension and interest from savings deposits. I have committed savings of Rs 30,000 (LIC policy, Mediclaim, Insurance). I would like to invest about Rs 65,000 in tax-saving equity mutual funds to get the benefits of the new section 80C. Please suggest a couple of good schemes, especially of the dividend paying kind.

R. Srinivasan

Investing such a large proportion of your yearly income in tax saving funds that invest in stocks would not be a good move.

You should not make a decision to allocate such a big proportion of your savings to equities, just for the tax savings they offer. Nor should you be unduly influenced by the recent performance of these funds.

Tax-saving funds have generated returns of between 30 and 150 per cent over the past year.

This is because they usually invest in stocks and the stock markets have offered impressive returns over the past year. But to expect the funds to replicate this performance would not be realistic.

After the sharp re-rating phase of the last two years, stock prices already capture the strong growth prospects for a majority of companies. From these levels, returns from the stock market could come down to moderate levels of 10-15 per cent a year.

If you invest in stocks, you also need to be prepared to wait out sharp declines in the value of your portfolio. There may also be long periods of waiting, when you may not earn any returns on your investment.

Stocks or stock-based funds should not form a big proportion of your retirement portfolio, because you may need funds at short notice.

You may not be able to time your exit from these funds to coincide with the best periods for the stock market.

Most tax-saving funds offer a dividend option. But since they distribute dividends only when they are able to book profits on stocks, the dividends too would be dependent on how the stock market performs.

So you cannot count on equity-oriented tax saving funds to declare regular dividends that will supplement your annual pension.

Considering these factors, we would suggest you go for one of two alternatives.

If you are conservative in your outlook and cannot take a big erosion in the value of your investment, consider investing in the Templeton India Pension Plan, which is also a tax saving fund; but with a balanced structure.

It invests about 60 per cent of its portfolio in debt instruments and only the rest in stocks.

The Templeton India Pension Plan has generated returns of about 15 per cent a year since its launch and usually pays out an annual dividend. It may offer more moderate returns than the pure equity tax- saving funds; but it comes with lower risks.

Alternatively, you can invest a small proportion of your yearly savings, say 10-15 per cent (about Rs 15,000 in your case), to equity oriented tax-saving funds.

In our view, Franklin India Taxshield and HDFC TaxSaver may be good funds to include in your portfolio.

Invest through the systematic investment plan so that you benefit from any weakness in the broad markets and avoid locking up funds at one level of equity prices.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.)

Aarati Krishnan

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