Feb 28, 2012, 05.09 PM | Source: CNBC-TV18
Small but regular investments go a long way in creating wealth over time. Systematic Investment Plan (SIP) is an ideal way for retail investors to benefit from the power of compounding.
Lovaii Navlakhi (more)
Founder & CEO, International Money Matters | Capital Expertise: Mutual Funds ,Fixed Income ,Insurance
Lovaii Navlakhi, MD & Chief Financial Planner, International Money Matters Pvt. Ltd advises investors to use the SIP route to reduce risk. For the purpose of saving tax, Navlakhi proposes investing in ELSS schemes of mutual funds with a three-to-five year time frame.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: An investor can invest Rs 4,000 per month. How should he allocate the money?
A: The investor has written that he is already doing Rs 4,000 a month in PPF, which means Rs 48,000 is going there which also gives him some tax saving and he wants to do another Rs 4,000 per month. So essentially, if he is looking at saving tax, there are two options for him, one is to look at something in the space of life insurance. But since he has mentioned he has adequate insurance and he has a three-to-five year time horizon, maybe investing in equity linked saving schemes is a good bet for him and doing in through an SIP route or a monthly investment will also reduce his risk. So ELSS schemes of mutual funds are good bets off the curve, possibly HDFC Tax Saver, Sundaram Tax Saver and Franklin Templeton Tax Saver are some of the names that come to mind, but I think a good number of them are performing well in the market.
Q: What kind of a return can he expect on this with a Rs 4,000 monthly investment?
A: The returns typically are linked with what happens in the marketplace and we have seen the last four-five years have been extremely volatile. But we have seen that even in these volatile times, if I look at a five year time horizon, getting a return of say 12% compounded annually may not be so difficult. So we should target for something in that range above 12% per annum compounded. If he makes more, which could happen, thatís a bonus for him.
Q: An investor can invest Rs 1,000 per month. Her goal is about Rs 8,00,000 and she wants to invest it for about eight years. Given that, she is investing about Rs 1,000 per month, itís a pretty easy return because her corpus itself is about Rs 9.6 lakhs?
A: Yes, I didnít take into account the corpus, but if somebody was to start afresh and had a eight year time horizon and wanted to get Rs 8 lakh then investing in equity mutual funds assuming 12% per annum, you need to possibly put in Rs 5,000 every month.
So as long as she is either doing Rs 5,000 per month or she already has a corpus, which is growing that will help her reach that goal. Since she mentioned that this is investment in her name and the earning member is her husband, I presume this is pocket money or extra money and therefore she can take risk because she has a long time horizon. Diversified equity mutual funds would be a good bet.
Q: Can you give her specific names?
A: Typically, when one constructs the portfolio, you should look at depending on the risk profile but something in the range of 60-70% into large cap and 30% into midcap. So in case of large cap funds, you could look at funds like DSP Blackrock Top 100, ICICI Focused Bluechip, HDFC Top 200, Franklin India Bluechip.
In the midcap space, there is IDFC Premier Equity or HDFC Mid-Cap Opportunities. If itís only Rs 1,000 a month, itís probably difficult to break it up so it is better to stick to the large cap. Pick one of the large cap funds and put all the money into a large cap equity fund.