Segregate investments for each of your goals to manage the portfolio separately

Review all your portfolios annually to ensure that you are staying with good funds


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I am 41 years old. I am investing Rs20,000 per month in diversified equity mutual funds via systematic investment plan (SIP) growth option for the past 2 years. I have a term plan for Rs1 crore as well as a Rs3 lakh medical cover from my employer and Rs5 lakh self medical cover. My goals are: accumulate a huge corpus for my two kids’ (3 and 8 years old) education and marriage, and my retirement. I have allocated the mutual funds for each financial goal separately. I am investing Rs4,000 a month for each kid in the following funds: Franklin India Prima Plus and UTI Equity Fund. How much approximate corpus can I get at the end of 15-20 years from now? Are these funds a good choice for long-term wealth creation? For my retirement, I am investing Rs3,000 per month in each of these funds: L&T Equity Fund, IDFC Premier Equity Fund, Quantum Long-Term Equity Fund, and ICICI Prudential Value Discovery Fund. How much approximate corpus can I get at the end of 20 years from now? Are these funds a good choice for long-term wealth creation?

—Ravindranath Satish

You are doing several things right about your investment strategy. Firstly, you have your goals well lined up with time frame and clearly identified purposes. Secondly, and more importantly, you have segregated the investments for each of your goals so that you can manage the portfolio separately. This step is something that many investors don’t do, and is a vital one for goal-oriented investing. Piling up all the investment holdings in one single heap and hoping they will grow and provide for different needs at different times is a style of investing that rarely yields satisfactory results. Coming to your questions, if you invest Rs4,000 per month in separate portfolios for each of your kids, in 15 years you can hope to have about Rs20 lakh (assuming a long-term compounded annual growth rate, or CAGR, of 12%). The longer you wait after that, the more the growth would be due to the power of compounding. The funds that you are investing in are solid funds and you can stay with them, at least for now, subject to annual reviews. Coming to your retirement, you are investing Rs12,000 a month in four funds. This investment should yield about Rs1.2 crore in 20 years. Here also, you are investing in an aggressive portfolio filled with equity funds. However, all the funds are of the same type: diversified funds with broad mandates. It would be good to have a mid-cap focused fund in the mix. For this, you could move from L&T Equity Fund to L&T Mid-Cap Fund. Also, you could replace one of the other three funds, say, the Quantum Fund, with a large-cap oriented choice such as Birla Sun Life Frontline Equity Fund.

Review all your portfolios annually to ensure that you are staying with good funds.

How frequently should one review the mutual fund portfolio? What are some of the things in a review that should raise an alarm?

—Suhas Pandya

The typical time-frame recommended for reviewing one’s mutual fund portfolio is to do it once a year. You could consider a milestone occasion annually to do so. For example, around the New Year or your birthday, just so that you remember to do it as a matter of habit. When you do this, you should be concerned about any fund in the portfolio that has failed to beat its benchmark during the past year. Considering that almost all good funds in the market regularly beat the benchmark in terms of returns, any fund that fails to do that should worry you.

The other thing to look for would be performance, as compared to its peers in its category of funds (those that are similar to the fund in your portfolio).

If a fund that you are holding does not rank in the top 25% or the second 25% within its category consistently (over two or more quarters), then you should realise that there are better funds out there in the market similar to the one you are holding (and with about the same risk profile). It is alright if a fund slips a bit for a quarter or two in this regard.

It is only persistent underperformance with respect to peers that should worry you. Also, you should look to see if any of the funds have changed their mandate or if any fund has had a new fund manager in the past year. These should be scrutinised to ensure that the fund is still capable of delivering to your expectations.

I invested Rs5 lakh in two equity mutual funds in 2010. If I redeem the units, what will be the tax applicable on the redemption amount?

—Roshni Kapoor

Assuming you invested in equity mutual funds that invest in the domestic (Indian) stock market, the redemption amount would be entirely tax free when you withdraw it. However, if you had either invested in equity funds that invest in international stock markets (like the US or Europe) or if you had invested in equity fund of funds (funds that hold other mutual funds in their portfolio), then these would be subject to taxation similar to how debt funds are taxed. In that case, the tax rate applicable would be 20% after indexation benefit is applied to the cost of your investment.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

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