Switch equity funds post lock in period to ELSS schemes

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: An investor can invest Rs 15000 per month for ten years; he expects 20-30% returns. He has invested in equity funds like Birla Sun Life Tax and DSP BR Tax and Fidelity Tax, Principal Tax and Sundaram Tax and holds insurance in LIC. How should he allocate the money?

A: For any opportunity, to give 20-30% per annum, you must have reasonable return expectations even if you are investing in an equity mutual fund. You either have to take a large amount of risk which probably is not warranted or you are set for disappointment, so first set your return expectations correct.

You first need to make sure even before you start investing that you have proper risk insurance and that includes a term policy, which should roughly be 10-12 times your income. You should take an adequate health insurance policy both regular policy as well as a top up policy, for yourself and our dependents. That itself will probably take away about Rs 3000 per month especially if you take disability coverage.

If something happens to you because of an accident or because of critical illness, that’s something that you need to cover yourself. All this together to be completely adequately cover will cost you roughly about Rs 3000 per month.

The balance amount should be invested in a balanced fund. Given your time horizon and the fact that the return on the balanced fund would roughly be about 12-13%, that is the expectation you have the risk profile there would be 70-75% equity, roughly 25-30% debt. You can look at HDFC Prudence, Birla Sun Life 95 and Reliance Regular Saving Fund. All the tax saving funds and  that you have once your three year lock in period is over, you should look at switching them into regular equity funds or into a balanced fund.

Q: For a person who is planning for assume two children - one girl and one boy for a period of 15 years, let’s assume the children are below five years and the investment amount is Rs 10000 per kid per month what kind of investment options should they look at for a 15 year period?

A: If you have a 10-15 year horizon, you could do 90% equity and 10% debt and for 15 year horizon PPF is one of the best options. So if you put 10% in a PPF through a regular SIP and the balance 90% you can put in well diversified or large cap equity fund. You can do Franklin Bluechip Diversified, HDFC Top 200, large cap DSP Blackrock 100 or HDFC Equity again.

Q: An investor can invest Rs 10000 per month. He has mutual funds of around Rs 80000 and an insurance policy with ICICI; the yearly amount is Rs 2800 and sum assured is Rs 1 lakh. His timeframe is 15 years and target is Rs 15 lakh. How should he allocate the money?

A: Before you begin investment, please make sure that if something were to happen to you, you need full cover. The cover that you have is totally inadequate, so the only way you can cover that is through a term policy. Please take that on line plus you need health insurance both for yourself and your dependents plus a disability cover for yourself, accidental disability and critical illness. All that and you probably see these details on the screen will cost you roughly about Rs 3000. That leaves you roughly Rs 7000 for investment.

Since you have a longer timeframe, you should look at a good well managed large cap fund such as Franklin Bluechip or HDFC Top 200 or DSP Balckrock Top 100 and a certain portion in PPF. So out of the Rs 10000, Rs 3000 goes towards insurance, and of the Rs 7000, put Rs 3000 each into two of these funds and possibly Rs 1000 into PPF, I think that should serve you quite well.

Q: An investor can invest Rs 15000 per month. His goal is to get Rs 50 lakh after 20 years. Currently, he invests in Rs 7500 per month in HDFC Top 200 and Rs 2500 in ICICI Dynamic Fund. Apart from that, he invests Rs 2500 in IDFC mutual Fund. How should he allocate the money?

A: If this is the only goal you have, I think what you are investing will be sufficient. But I presume you would have other goals as well apart from this goal. While this is for your child, you would have other goals such as retirement, so that’s a decision that you need to take.

All the three funds that you have are well performing funds. The IDFC Premier Equity, of course, is a midcap fund, if you want to invest further Rs 15000 then again I would advise again very similar roughly Rs 3000 will go in a life insurance policy. It hasn't performed well in terms of fund performance and the surrender charges now are not very high.

So we would recommend that you surrender it and make sure that you enough life insurance and health insurance as well as disability insurance. I would not advice you to add to many funds, you already have two good funds. Add Rs 7000 in those funds, HDFC Top 200 and ICICI Pru Dynamic and maybe add one more Franklin Bluechip for the balance Rs 5000