Ask Mint Money | Over a time frame of 20 years, not taking any risk not prudent

I am 26 years old. I want to invest Rs 10,000 each in HDFC Top 200 and Sundaram BNP Select Mid-cap for three-five years. Are these good? I don’t have any goals.

—Lakshmi

Your portfolio is a trifle too aggressive for the timeframe of your investment. You have one large-cap-oriented fund in HDFC Top 200 and that is a good pick. However, you have chosen a mid-cap fund also and that would make your overall portfolio take more risk than it should. I would suggest two alternatives to you.

If you want to keep two funds in your portfolio, consider replacing your mid-cap fund with an equity-oriented balanced fund such as DSP BlackRock Balanced or Birla Sun Life ’95. Alternatively, you can invest in two funds instead of the Sundaram Mid-cap fund by investing Rs 5,000 each in a pure large-cap fund such as Franklin India Bluechip and in a debt fund such as Birla Sun Life Dynamic Bond fund or UTI Short-term Income fund.

In the first alternative (two funds in the portfolio), you will be investing about 15-18% in debt and remaining in equity. In the second alternative (three funds), you will be investing 25% in debt and 75% in equity. Even these choices make up for aggressive portfolios, but with relatively less risk exposure than the one you had designed.

I am 40 years old and want to invest in mutual funds (MFs) that can provide me monthly income once I retire. I can invest up to Rs 25,000 monthly for 20 years. I am risk averse.

—Jitendra Jha

Though you indicate that you do not want to take any risk, since you are looking to invest in MFs, which as a class of investment does not guarantee any returns, I assume you are looking merely to minimize the risk as much as possible. Also, over a time frame of 20 years, not taking any risk would not be prudent. While the risk incurred in a portfolio is not always proportional to the returns earned, there is a reasonable amount of positive co-relation between the two attributes, especially over a long term.

Also, over the long term, the possibility of inflation eroding the value of money is a real risk. Investing in equity-oriented funds is the best way to counter that risk. A proper portfolio for you would be an all-equity one for the next 15-16 years. At that point, you will need to start reducing your exposure to equity funds to get ready for the withdrawal phase. You can start with five funds—two large-cap such as DSP BlackRock Top 100 and ICICI Prudential Focused Bluechip fund; two multi-cap such as Quantum Long Term Equity Fund and Tata Equity PE fund; and one small/mid-cap fund such as HDFC Mid-cap Opportunities. You can split Rs 25,000 evenly between these. While the allocations can remain like this throughout the equity investing period, you should review the portfolio every couple of years.

Srikanth Meenakshi is founder and director, FundsIndia.com

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