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Business News/ Money / Calculators/  Diversification is lost if you have more than eight MFs
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Diversification is lost if you have more than eight MFs

Managing these funds will also become difficult

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To meet its divestment target, the government, along with Goldman Sachs Asset Management India Ltd, launched an exchange-traded fund (ETF) called the Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF). This ETF is composed of select public sector companies. Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV India, tell you if it really worth investing in the ETF. Edited excerpts from their show, Smart Money:

Vivek: First of all, Monika, could you explain what CPSE ETF is all about? And secondly, who should invest in it?

Monika: What is this complicated creature called CPSE ETF? Think about it the way you would think of an index fund except this has much lower costs and it is to be bought and sold on a stock exchange because that is where it is listed. Index funds are mutual fund (MF) schemes that are not actively managed by the fund manager.

The CPSE ETF’s portfolio constitutes stocks of 10 public sector undertakings (PSU), such as Oil and Natural Gas Corp. Ltd, GAIL (India) Ltd, and Coal India Ltd. The index has been created based on the prices of these stocks, and this ETF will mimic these stock prices. So, if these 10 stocks do well, the ETF will also do well, or vice versa. You will get average returns of the performance of these 10 public sector undertakings.

To encourage people to buy this ETF, there are several incentives on offer. One, of course, is that its expense ratio is low (0.49% a year). A managed equity fund today costs almost 3% a year in fund management. Two, people who would have bought this ETF during the new fund offer (NFO) period would have got a 5% discount. Those investors who bought units during the NFO and will hold on to them for a year, get one unit extra for every 15 units held. First-time equity investors will also get 50,000 tax break under the Rajiv Gandhi Equity Savings Scheme. These are some of the incentives to invest in the CPSE ETF, which will list on the stock exchanges by 4 April. By 11 April it will be open for redemption and repurchase by other investors.

Vivek: If someone wants to take a call on the success of these 10 PSUs, is it better to invest via this ETF than investing in the stocks individually?

Monika: Absolutely, because if you have a view on PSUs, then your risk is added in terms of choosing one company over the other.

Vivek: Now, Maneesha joins us from Mumbai. She wants to know about her medical insurance, pension and whether her investments are on track.

Monika: You are a homemaker, Maneesha, who has taken it upon herself to look after the inflows and plan a future. And you have done very well. Your husband is a marine engineer and there are good inflows into the money box. You have done extremely well to construct a robust money box. Yes, you did talk about your pension plans, but as I decode your products, there are a lot of other assets as well.

You have two children, and you have already planned for their education and marriage. You have real estate in the name of both of them. I see a multitude of products including insurance plans, MFs, gold and, of course, real estate.

You had three questions: about medical insurance, pension plans and the third asking whether you are on track? You said that your husband does not like life insurance and he has none. Given the number of assets in your money box at the moment, you don’t need life cover. Your assets will be enough for what your future demands are likely to be.

You also said that your medical insurance is a concern. Yes, it is a little less. You need 5 lakh individual policy covers for each of you, plus a top-up of 10 lakh family floater cover. I am sure your husband is covered by his employer, but it’s time to build your medical cover, and you have the money to pay the premiums.

You can have a look at the Mint Mediclaim Ratings, which measures basic health insurance or indemnity policies, to choose a cover.

Now, the pension plans. Your portfolio has a plethora of well-chosen MFs. A person like you does not need endowment or pension plans, which are basically insurance-linked plans. Let us look at endowment plans. An endowment plan does not give much of a return for an insurance cover. It gives 4-5% on a compounded annual growth rate basis. I would not hesitate in letting go of the endowment plans and use the money elsewhere.

You have already paid the premium for at least one of the pension plans. It makes no sense to let go of this plan now because that money has been paid upfront. For the other plans, you should look at what the surrender benefits are. If the surrender value is fairly substantial, you should let go of those plans.

Also, there is a period of high earning ahead of you. So, it is okay to plan and invest the rest of the money in other products.

Your portfolio is fairly diversified. Your concern is retirement. You need to think about this in terms of what you need. You need about 1 lakh a month at about 8% return on a corpus of 1 crore. So you have to start adding up your money to see how much of that 1 lakh will come from your pension plans. For the rest, you will need to build a corpus. The assets are there; you need to find the products. You already invest in MFs. Along with these, you can invest in tax-free bonds and inflation-indexed bonds as well.

You have obviously picked good funds. But by having too many funds, even if they are well chosen, you let go of the advantage of diversification. You have more than 15 funds; you don’t need more than eight. If you have more than eight funds, you will loose the advantage of diversification and managing these funds will become difficult.

Evaluate what products you have in one asset class. If it is equity, you do not need more than six to eight funds. So you need to let go of them.

Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.

Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30pm, Sunday: 10:00am, 12:30pm and 05:30pm on Bloomberg TV India.

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Published: 24 Mar 2014, 07:49 PM IST
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