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In current market conditions, any loss of capital should be cause for concern

LiveMint logoLiveMint 19-07-2017 Srikanth Meenakshi

I had invested in a few mutual funds schemes 4 years back. Out of five schemes, two have given me negative returns of 4-8%. Ideally, people say not to worry about the short-term returns when investing for long term. What other parameters can I check to determine if I should exit the fund?

—Nikhil Srinath

Over the last 4 years, no category of mutual funds has had a negative average return other than gold funds.

If two of your funds have such negative returns in this time period (and they are not gold funds), it could only mean that the funds you hold have done considerably poorly with respect to their category average or their benchmarks. If that is the case (or if you are holding gold funds, for that matter), you should exit these funds and invest the proceeds in better funds.

Although it is true that an investor should not worry about negative returns over the short term, that advice is more applicable when the overall market is having a downturn.

The markets right now, and over the course of the past few years, have had anything but a downturn and in these circumstances, any underperformance or loss of capital should be cause for serious concern.

Performance evaluation of mutual funds is always relative—to the benchmark of the fund and its peers in the industry. In your case, there is clear underperformance along both these dimensions, and that is reason enough to exit them.

I am 27 years old and have been saving money through recurring deposits (RDs) and fixed deposits (FDs) for the past 4 years. I wish to start my first systematic investment plan (SIP) and can invest Rs5,000 a month. Can you suggest one or two schemes where I can invest? I don’t want to take high risks and I am okay with any returns higher than bank FDs and RDs.

—Suraj Pradhan

The first step to a successful investing habit is a successful saving habit. Only when we develop the discipline to save regularly will we have the means and mindset to start an investing habit.

I am glad to note that at this young age, you have already been saving regularly over the past few years.

When it comes to investing, considering your age, I would advice that you expose a part of your monthly investment to market risk.

However, since you have clearly indicated that you do not want to take risks, let me suggest a few options to you and you can choose what feels comfortable to you.

If you want to take only very low risk with your investment, you should go with only pure debt funds such as short-term funds. UTI Short-term Income Fund and ICICI Prudential Short-term Fund are good choices here.

If you can take a slightly riskier approach, you can mix in a debt-oriented hybrid fund (also called MIP funds) in your portfolio.

You can choose one of the short-term funds from above, and can add in HDFC Monthly Income Plan – Long-term Plan (equal amounts for both the funds).

And, finally, if you are okay with some moderate risk in your portfolio (and this would be my recommendation), you can add in a equity-oriented hybrid fund (balanced fund). In that case, you can invest Rs2,000 in the short-term income fund, Rs2,000 in the MIP fund, and Rs1,000 in a balanced fund such as HDFC Balanced Fund.

I am 23 years old and earn Rs5.5 lakh per annum. I have two SIPs of Rs4,000 each: one in ICICI Top 100 Growth Fund and second in Reliance Tax Saver (ELSS) Fund (Growth).

I also save Rs4,000 every month in Public Provident Fund (PPF). Considering that PPF returns are reducing on every year, should I change my investments to tax-saving equity-linked saving scheme (ELSS) mutual funds? Also, can you please tell me if I have chosen the correct mutual funds considering my long-term wealth creation plan? Can you also suggest some high-risk, high-return mutual funds as I can save for the long term.

—Navtej Singh

Tax-saving mutual funds definitely have the potential to give higher returns than PPF investments.

This is true especially these days, considering the declining interest rates in PPF, and it is all the more applicable for a young person such as yourself who could take higher risk with their investment portfolio. So, the answer is yes, you should move your monthly PPF contribution to an ELSS fund such as Invesco India Tax plan.

Regarding your current portfolio, you can shift your ICICI Top 100 investment to a similar fund from the same fund house that has a better track record: the ICICI Value Discovery Fund.

And if you are looking for high-risk funds, do consider investing (systematically) in a couple of mid-cap funds such as HDFC Mid-cap Opportunities Fund and Mirae Asset Emerging Blue-chip Fund.

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

Queries and views at mintmoney@livemint.com

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