Equity funds still a good entry point, say experts

If you decide to invest in a Systematic Investment Plan (SIP) just by looking at its returns, you could be in trouble. Before choosing a SIP investment, have a look at its entry and exit loads.

 

Experts Ajay Bagga, CEO of Lotus Mutual Fund and Anil Chopra, CEO of Bajaj Capital, analyse investments to make things best for you.

 

Earlier, mutual funds charged 1% entry load, but the situation has changed now with some fund houses charging up to 2.25% entry load on SIPs. Considering the growing popularity of SIPs and the cost factor of mutual funds, Reliance, HSBC, SBI, DSP Merrill Lynch, Franklin Templeton, and ING Vysya mutual funds are charging customers full entry load on SIPs at the start itself.

 

According to Vikas Sachdeva, Country Head, Business Development ING Vysya, "You invest in SIP and equity fund with an idea of getting good returns. An average return in SIP would be somewhere around 15-18%. And it does not make much of a difference whether you pay an entry load of 2% or 1%."

 

"For example, an SIP of Rs 1000 will cost you an entry load of Rs 20. But it would not have much impact on your returns. SIP gives you the choice of paying a certain amount every month. Entry and exit load on one time investment does not make much difference."

 

So far, not all mutual fund companies have begun charging the full load initially from customers. But if you want to book profit within the first two years of investment in the SIP, you will certainly have to pay the exit load of 1.25%. Even if one has a one year SIP, one will get a load free investment only at the end of two years. It takes more than one year to make your SIP free from capital gains tax.

 

Q. Considering the situation in the market, what should a mutual fund investor do? Should he/she stay or withdraw or rebalance the portfolio?

 

Bagga: It would be better to take a fresh look at your portfolio. In case, you have enough equity, you can withdraw some of it at this point. For those you have not invested much in equity so far, it can be a good entry point.

 

While it depends largely on individual preferences, industry's thumb rule is to deduct your present age from 100 years and that should be your investment in equity. If you are 30 years old, it means 70% of your portfolio should be equity.

 

My advice to our readers is that they should first understand equity and mutual funds and then invest in it. Only two crore of the country's one billion population invests in equity and mutual funds whereas about 45% still put their money in bank deposits.

 

Q. Are investors dealing with the situation with more maturity after the recent crash in the market? 

 

Bagga: Equity is basically a long-term investment option and Sensex movements should not bother you.

 

The same principal applies to SIPs. You should invest small amount every month in equity funds with an idea of a long-term wealth creation. But if volatility bothers you much, it is time to get out of the investment.

 

Q. Will it be wise to invest at a time when NAVs are coming down? I am a small investor and have invested Rs one lakh in Franklin. But for the past one year I have not received any returns, not even 5%. Is there any scope for returns or should I withdraw at this stage?

- V Taneja, 50 years, Retired Officer

 

Chopra: First, it was a wrong decision to invest in an equity fund just for a year. You should be ready for losses now.

 

In an equity fund, you should always have a time horizon of three to five years. Franklin is a five-year close-ended fund with a time horizon of at least five years. If you are planning to withdraw money at the end of one year, you will have to shell out a heavy exit load. But if you remain invested for five years, the exit load will keep on decreasing each year. For example, exit load in the first year will be 5%, second year 4%, third year 3% and so on.

 

In my opinion you should remain invested and wait. Results of the companies, where Franklin's fund manager has invested, will take some time to show up.

 

Ajay: If you look at the track record of Franklin, it has given good returns in the past. Smaller companies have outperformed largecap companies by 10-15% in the last 15 years.

 

For the market falls, prices of smaller companies go down drastically and since liquidity is low smaller companies take time to emerge from the fall. Say if you have a base of Rs 100, it is easy to make it Rs 1000. But a base of Rs one lakh is a bit difficult to be made into Rs 100 crore.

 

Q. How profitable will it be to liquidate and invest in Bluechip Funds? I had invested some money through SIP route in HDFC Equity Fund, Franklin Prima, Reliance Growth and HDFC Capital Builder. Now that the SIP has matured, should I redesign my portfolio?

- Preeti Kargonkar, 25 years

 

Ajay: You have chosen some of the best funds. HDFC, Reliance, Franklin have been known to given good returns. You must have got around 40-60 percent returns from the four funds in the past one year. So stay invested.

 

Anil: You had invested with a time horizon of one year and despite correction in the market you got 15-20% returns as one expects from mutual funds. But your horizon of one year was very short. One should have a long-term investment in equity. So best deal at this point in time is to remain invested.

 

Q. I have invested Rs 15 lakh in mutual funds, including Rs five lakh in ELSS and Rs 10 lakh in equity diversified funds. Now that the market is falling, will it also affect my investment, particularly when the ELSS is directly connected with the market?

- Piyush Sharma, 34, Engineer

        

Ajay: ELSS has a lock-in period of three years. Therefore you can't withdraw Rs five lakh now. However, if you keep a lock-in period of 10 years, you will get good returns.

 

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