The Hindu Business Line : Fund Talk

The expectation of a 20-22 per cent return every year from your equity fund portfolio is unrealistic, as fund performance can vary from year to year.

I am a keen investor in my mid-40s, interested in building a mutual fund portfolio from scratch. The time horizon I have in mind is 3-5 years and the rough break-up is 50 per cent equity and sector funds (target return 20-22 per cent year- on-year), about 30 per cent in FMPs (target return 10 per cent post tax) and about 20 per cent in ELSS (target return 15 per cent post-tax). I know that timing the market is not a good thing but given the correction due to the sub-prime hungama, can you suggest a model portfolio for the above break-up? My intention is to deploy the funds (not through SIP) but through various apportionments within the next three months. I would like to make use of the 10-15 per cent correction from the 15000 levels. Is it worth waiting for SEBI’s decision about the removal of entry load for direct purchases from the fund house? Amid a 10 per cent correction, a 2.5 per cent load will further eat into my returns.

Kalyan J

Hyderabad

The market has recovered quite a bit from its lows, which may prove a spoiler for your plans to time the market.

However, your decision to plan your investments to take advantage of similar market corrections has its merit, as volatility is here to stay. Investing in large-cap funds during such sharp market corrections could prove lucrative, as it gives you access to several index stocks at lower levels and more attractive valuations.

Birla Sun Life Equity, DSPML Opportunities or DSPML Top 100 Equity, Franklin India Prima Plus and Magnum Multiplier Plus are some large-cap funds you could consider for your portfolio. Among the mid-cap funds, Magnum Global, Reliance Growth and Birla Midcap are a few good options.

If you are a more aggressive investor, you can consider adding Sundaram Capex Opportunities and Kotak Lifestyle. We prefer theme funds that focus on a wider range of sectors than pure sector funds such as a technology or FMCG fund. While theme funds can boost the overall returns of your portfolio, there is the risk of the theme going out of favour. Investments in theme funds require good timing and a more active profit-booking strategy.

To achieve your target return of 20 per cent from equity funds, you may have to invest up to 30-35 per cent of your surplus in mid-cap and theme funds. At this point, we would also like to caution you on your return expectations. True, if the economy sustains this 8-9 per cent growth rate, we could expect an annualised return of 15 per cent from the average diversified equity fund over a 5-6 year period and maybe even 20 per cent return, depending on the fund manager’s skills and your own investment profile. However, the expectation of a return of 20-22 per cent every year from your equity fund portfolio is unrealistic. The quick recovery from every market correction over the last four years may encourage us to believe that all corrective phases in stocks are temporary.

But a correction phase or a period of underperformance can be more prolonged than just the couple of weeks that has been the case so far. Fund performance can vary from year to year, from average returns in excess of 20 per cent in one year to single digits or even negative returns in the next.

You might also want to re-consider your post-tax return target of 10 per cent from fixed maturity plans. Such yields are unlikely under the current interest rate scenario from a pure debt investment.

But they may be possible if you consider hybrid funds (such as balanced funds) or FMPs with an equity component. Postponing your decision to invest until the waiver of entry load for direct purchases from mutual funds appears impractical. Returns from a well-timed entry into equity funds would far outweigh any outflow due to a 2-2.5 per cent entry load.

Shanthi Venkataraman

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