The Hindu Business Line : Don't mind the load

I have invested in Prima and Bluechip of Franklin Templeton using systematic investment plan (SIP) between February 05 and July 05. When I started SIP, this investment was free from entry load and subject to exit load only if redeemed within a year.

With effect from this month, Templeton has introduced an entry load on SIP investments at 1 per cent and exit load of1 per cent, if redeemed within two years.

This applies even to tax-saving funds. In the wake of this development, please advise me whether to continue my investments in these funds on a SIP basis. Please suggest a good tax-saving fund with low risk.

S.V.R. Rao

The new entry load of 1 per cent will not apply to any of the SIPs you already hold. It will apply only to systematic investments that you started on or after the effective date of July 6 2005.

Even so, we suggest you continue with your SIP investments, if you are convinced about your choice of funds based on their performance.

The load structure is not a factor that should dictate your choice between equity funds.

Funds with a good track record usually charge a higher entry load. But as they usually deliver returns several percentage points higher than that of the index and their peers, the load will not significantly affect your returns.

The load structure could be an important deciding factor with a debt-oriented fund, because loads, in their case, can significantly cut into your effective returns from the fund.

You really should not mind paying a nominal entry load (or an exit load) for an equity fund that has a good performance track record. The entry load is not a recurring expense. It is a one-time charge and if you intend to hold your investments for a long period, which you should with an equity fund), the impact of the load on your eventual returns will be negligible.

Over the past five years, an SIP in the Bluechip Fund would have earned you an annual return of 36 per cent and an SIP in Prima would have earned you 58 per cent.

Such numbers show that an entry load of 1 or 2 per cent on your investment would not have made a material difference to returns!

Going forward, while such high returns may not be possible, we expect diversified equity funds such as the Bluechip and the Prima to deliver annual returns of 12-15 per cent over a five-year period.

An entry load of 1 per cent would not materially reduce the attractiveness of these funds relative to other investment options.

As to your query about tax saving funds, many tax saving funds now have a focus on mid cap stocks. Therefore, tax saving funds usually carry a fairly high risk profile. Among the various equity-oriented tax saving funds, HDFC TaxSaver is a good option. The Templeton India Pension Plan is our preferred option, if you are looking for a low risk tax saving fund. This is a balanced fund with an exposure of over 60 per cent to debt.

This would mean a lower risk profile; but you should also expect more moderate returns. You can invest in this fund only if you are below 58 years of age.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Aarati Krishnan

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