The Hindu Business Line : Fund Talk

I am new to mutual fund investing. I earn Rs 15,000 per month and can invest Rs 7,000-8,000 every month through SIPs in equity funds. Are there any funds offering SIPs? Do you think the newly launched Tata SIP Fund is a good option? I would like dividends from my investments.

Hari Shankar Rai

Investing more than half of your monthly salary in equity investments appears inappropriate, if this is to be your only savings avenue. Though they have the potential to deliver healthy returns over the long term, equity funds can expose your capital to value erosion, if the stock market declines or enters a prolonged bearish phase. Hence, in our view, you should decide on your allocation to equities only after setting aside some money in safe investment avenues that offer fixed returns. Assuming you are in your 20s or 30s, we would suggest you have 20-30 per cent of your total savings parked in a combination of debt instruments, small savings schemes and fixed deposits, which would offer capital protection in addition to a predictable return. You should also invest in a term life insurance policy for yourself. If you have done this, you can decide on your equity allocations and start your mutual fund investments.

Among equity funds, we think seasoned equity funds with a good five-year track record are better suited to first-time investors than a new fund, which has just opened for subscription. There are several diversified equity funds available on tap (open-end funds), which would allow you to invest through the SIP (systematic investment plan) route. HDFC Equity Fund, HDFC Top 200, Franklin India Bluechip and the Tata Pure Equity Fund are some of the funds you could consider. Each of these funds has delivered consistent returns to investors through different market cycles over five years or more. This makes us more confident of their ability to weather any corrective phase in the stock market, compared to a new fund. You can subscribe to these funds through their respective sales offices in your city or through branches of established banks, or distributors who sell mutual fund products.

However, you should probably take note of the differences between an SIP in an existing open-end fund and the Tata SIP Fund, before making a decision. When you make an investment in the above open-end funds, you would be spreading out your investment through monthly instalments by issuing post-dated cheques. In the case of the Tata SIP fund, you are required to invest a lumpsum and the fund manager will be re-directing your money into the equity markets in a phased manner, by increasing the equity exposure each month.

The Tata SIP Fund's allocation to stocks will rise at a steady pace from 2.75 per cent in the first month to 99 per cent in the 36th month. The benefits of this systematic investing would, however, be realised only for those who stay invested for more than a three-year period.

When you buy the Tata SIP Fund you are getting a hybrid fund that invests in a mix of debt and equity for most of its tenure. Whereas, if you opt for the existing open-end funds, these will offer you a pure equity exposure. Therefore, your investments in Tata SIP Fund may have to be higher to obtain the same equity exposure, which, in turn, requires a higher initial investment.