Money Matters

  • Ifthikar Bashir
  • Publish Date: Apr 30 2018 1:49AM
  • |
  • Updated Date: Apr 30 2018 1:49AM
Money Matters

I am a first time investor. I want to know why you recommend balanced funds. And can you suggest a few balanced funds for me?

Murtaza, via email

 

Markets are cyclical. Equity funds have done very well in the recent past. But choosing equity funds on this basis alone will not get you great returns in the future. Balanced funds invest 25% of the corpus in fixed income. This gives more stability to the fund. The fund manager rebalances the balanced fund daily. This is great in range-bound markets because one is able to adjust the weights in accordance with shifting equity and debt valuations.

First time investors should invest through SIPs and not in lump sums. In terms of specific funds, I would suggest Tata, ICICI, Aditya Birla or Franklin India’s balanced funds.

 

Which debt fund would you recommend for a weekly Systematic Transfer Plan into an equity fund?

Khawar Bashir, Soura, Srinagar

The primary goal of an STP is to average your investment in equity. So, logically, it doesn’t matter. You want to eliminate the possibility of catching an equity market high. Let’s assume you have Rs 50 lakh that you want to spread over the next year and you want to do a weekly STP, which means about Rs 1 lakh moving into a weekly STP. Whether this money earns 7.5% or 8% is not going to make a meaningful difference, what is going to be meaningful is eliminating the possibility of catching the equity market high. Equity market volatility is a very different kind of risk. The primarily objective is to reduce the risk of catching an equity market high, the choice of liquid or ultra short term bond funds does not make a difference.

 

I am a 45-year-old businessman and an avid reader of your column. You have been regularly advising about investing in mutual funds and buying a term plan. My family consists of my wife and three children. How much term insurance do I require? Please suggest a good plan. I don’t have any as yet.

Waseem Ahmad, via email

 

A commonly used rule of thumb to calculate your required insurance cover is 10 years’ income, but there could be other influencing factors – your children’s education needs and liabilities. You should take into account all these factors and their financial implications to make a reasonable estimate of how much insurance you need. 

For choosing a good term plan, three factors need your attention. One, claims settlement ratio. This is the total number of death claims approved by an insurance company divided by the total number of death claims received by it. Go for a higher number. Two, premium amount. Term insurance is an efficient, low-cost product. However, the premiums can vary widely between different insurance firms. Go for the one charging relatively low premium. Both claims ratio and premiums for different insurance firms can be easily found and compared online these days. Choose the one which offers a reasonable combination of high claims ratio and low premiums. Three, riders. Riders are additional benefits that can be purchased with a life insurance policy to enhance your insurance cover. Riders can protect you against a host of unexpected tragedies.

 

 

I am a private sector employee and have just received my annual bonus of Rs 3.5 lakh. Can you suggest a liquid fund to invest it in? 

Asif, via email

 

You can choose any one of the four largest liquid funds. There isn’t much difference in the performance of liquid funds. Liquid funds will give you a little more return than a savings bank account and even a short-term fixed deposit. Look for one for where you can download an app which allows you to redeem your money anytime. If you are unlikely to need this money for a long period, consider other options like equity mutual funds.

 

 

I run my own company and am in business for the last 10 years. Which sectors should one invest now that GST has been implemented? 

Ali Khan, Noida

 

Don’t try to find specific businesses or sectors that are beneficiaries of GST. This is why you hire a fund manager. In the short run, most businesses have suffered because of the GST realignment. Different businesses have been impacted differently. Small businesses have suffered the most. Some businesses will find it difficult, some will find it easy because now they can produce or sell anywhere with much less friction. Businesses in the long term will benefit. Large businesses, especially consumer-facing ones, will benefit more. GST is supposed to be a fair, predictable and transparent system but there is huge scope for improvement in its implementation across various sectors. I would generally urge you not to consider a thematic or sector fund to take advantage of GST. Choose a good fund and the fund manager will take care of GST.

 

 

I want to invest in equity mutual funds that offer regular dividend payouts. How can I pick funds that pay most dividends? 

Sheikh Shabir, Hyderpora, Srinagar

 

One should not be investing in equity funds to derive income through dividend payouts. The dividend from equity fund is not a bankable source of income. Dividend earning is not the right approach to evaluate a fund. When you choose a fund you should look at the overall return of the fund and not the dividend it gives. In a bad market, a fund might give dividend even when it is losing value. This will create a false impression to investors that the fund is performing well as it is yielding dividend. In an open-ended equity fund, dividend doesn’t matter. In fact, the value of your investment goes down to the tune of the dividend that you receive. Assuming a fund’s NAV is Rs 20 and the fund gives a 20% dividend on the face value, then the NAV on that day will be Rs 18. This means the dividend is no particular gain. You simply get your money back. Investors should look at a relatively stable or growing portfolio. Take out the gains periodically based on the goals. For example, a good withdrawal percentage will be 5% in a year. Say, for a Rs 12 lakh corpus, the annual withdrawal should not be more than Rs 60,000. This will help the fund grow and protect the capital.