Apr 24, 2012,14.32 IST
Allocate 10% in gold during stock market uncertainty
On the occasion of Akshaya Tritiya, Lovaii Navlakhi, MD & Chief Financial Planner, International Money Matters Pvt. advises investors to allocate at most 10% of one's funds in gold especially during times of stock market uncertainty.
Navlakhi is of the opinion that long-term government security funds are very good investment vehicles when interest rates are going downward. However, interest rates have continued to remain high. Therefore, it may make more sense for retail investors to be at the short end of the fund cycle on the debt side. Some short-term debt funds are probably better bets to invest money in.
Below is an edited transcript of his interview. Also watch the accompanying video.
Q: How do you see gold as an investment option?
A: In the last few years, gold has really done very well, and therefore, has attracted a lot of attention. We personally believe that gold is a part of an asset allocation strategy. In the normal course of time, when there is no uncertainty in the equity market, we recommend 5-7% allocation of your assets in gold.
In times of uncertainty, then you can increase your allocation to maybe 10%, but not more than that. It has done very well, but that doesn’t mean that the sharp rise will continue.
Q: An investor wants to invest Rs 100,000 in lump sum in a debt fund for five years. Are these good funds to go with?
A: The long term plan of Birla Sun Life Government Securities Fund is a good choice. That fund essentially invests in government securities and bonds. But at this moment, this fund has more than 40% of its money in cash. So he is not really getting the benefit of being in a government security fund.
One basic rule for most investors is that long-term government security funds are very good investment vehicles when you expect to see rates going downward. While there are a lot of expectations in the last few months, it has happened in reality because of various reasons - inflation, supply side constraints etc. So interest rates have remained higher.
People who have invested in these G-sec type of funds may actually have lost money in the last one month or so or they are just about breakeven. Therefore, it may make more sense for retail investors to be at the short end of the fund cycle on the debt side. Some short-term debt funds are probably better bets to invest money in.
Even HDFC's Short Term Opportunities Fund is run more like a liquid fund. If its cash and it’s a five year time horizon then I would put money in short-term funds. IDFC short-term Super Saver Income Short Term Plan and the Templeton India Short-Term Income Plan are better bets.
Q: Considering the tax efficiency as well of mutual funds, would these short-term opportunity funds be the best vehicle for someone who doesn’t want equities or would PPF (Public Provident Fund) also be equally tax efficient? How do the various debt instruments compare?
A: When I compare debt instruments, the first thing to possibly look at is the time horizon. So PPF, for example, if I am starting now with a 15 year lock in, if I need money in five years, that is possibly ruled out.
On the other side, you have to look at the applicable tax rates. If you do not have any income, say a housewife invests some money then the initial Rs 2 lakh is exempt from tax. It can be invested in fixed deposits, which could be AAA type fixed deposits, which are otherwise taxable, but because you have no other income, it becomes a tax free sort of avenue. So factors like tax, return, liquidity and time horizon are to be taken into account before investing.
Q: An investor is looking forward to invest Rs 20,000 per month. His goal is to have a surplus of Rs 20-25 lakh after a span of 15 years? His company covers his insurance and he holds Systematic Investment Plan (SIP) of Rs 6,000 currently per month in equity?
A: With Rs 20,000 a month and a 15 year time horizon, he will actually invest Rs 36 lakhs. So pretty much he doesn’t need to do anything if he needs only Rs 25 lakh. But I am sure he wants his money to grow. With a 15 year time horizon, he should look at a higher weightage in equity rather than a debt.
Assuming that he would get about 12-15% per annum in terms of his portfolio, he would get something like Rs 1.3-1.8 crore over the next 15 years. The idea would be with Rs 20,000 a month by way of SIP in equity funds, as he approaches the 8-10 year period, he can start reducing his equity exposure. He can pick again typically more large cap funds; maybe 50-60% in large cap and have 20-25% in the mid cap space and the balance in multi-cap. So my specific suggestions would be funds like DSP Blackrock Top 100, ICICI Dynamic Plan, and HDFC Mid Cap Opportunity Fund.
Further, he says he has his company’s insurance – just needs to keep in mind that at some stage he may leave his company and then the new company either may have insurance or will take the insurance only after he joins, and if there is a gap, there could be an issue. So, he should look at having some insurance of his own.
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