Avoid close-ended funds

I had invested Rs 3 lakh in the new fund offer (NFO) of SBI One India Fund in 2006. The fund was a dismal performer in 2007 and 2008. I had a long-term horizon. Should I remain invested or switch to another fund? If yes, which one?

-Biyani M L

SBI One India debuted as a close-ended equity diversified fund in December 2006. It invests in a diversified basket of stocks across all four regions of India, without any sector or market-cap bias. It did not fare well during the downturn and barely managed to beat the category average in 2009. It is rated one-star. The fund recently (January 2010) got converted into an open-ended fund.

We suggest you exit this fund and opt for an open-ended fund with a good record. You may choose from HDFC Top 200, DSPBR Equity or Magnum Contra. In future, avoid NFOs and close-end funds. Mainly because close-end funds accept investments only in lumpsums and only during the NFO period, a time when the fund has no history. Though past performance doesn't guarantee future returns, it is an important tool in gauging a fund. Also, by parking money at one go, you miss the advantage of systematic investing. Why block your money?

I invested in Principal Tax Savings Fund on February 2008. I want to transfer my money from my current fund to, preferably, Sundaram BNP Paribas Taxsaver or Principal Personal Tax Saver Fund. Is it possible and what are the tax implications?

-Shalin Dubey

Principal Tax Savings is an equity linked saving scheme, with a lock-in period of three years. Once invested, you cannot withdraw before the completion of three years. You have to stay invested till February 2011.

After the lock-in period is over, you may switch to any other fund, not necessarily with the same fund house. Since your holding period will be more than a year, you shall be exempt from the long-term capital gains tax (LTCG). This being an equity fund, any redemption (or switch) will be subject to a securities transaction tax (STT) of 0.25 per cent.

Does it make sense to book profits in equity mutual funds and move the money to a public provident fund (PPF) account, so that it's locked and can be used for my retirement?

-Sameer

At your age, retirement is far off and you have sufficient time to accumulate your retirement corpus. For the long term, investment in equities is always better than any other investment avenue. Stay invested in equities and as and when you approach your retirement, shift from equities to debt funds. At this stage, there will be no benefit in moving your money to a PPF account, as it would be locked-in with a static return of eight per cent per annum. On the other hand, by investing in equity diversified funds, you can conservatively expect to earn around 10-12 per cent per annum.

If I have to invest in mutual funds for good returns over three to five years, which equity diversified funds should I buy?

-Amod Desai

With a three- to five-year horizon, go for a top-star-rated equity diversified fund like Magnum Contra, DSPBR Equity, HDFC Top 200 or BSL Frontline Equity. These funds have had a proven record and given relatively superior risk-adjusted returns in the long run among those in this category.