Choosing well-rated funds is a sensible selection

I had invested Rs 25,000 each in HDFC Top 200, HSBC Equity, Reliance Growth and Magnum Taxgain in April 2009. At the time of investment, all these funds were 5-star rated, but now I notice their ratings have come down to 4-star. Have I chosen the correct funds? And, should I remain invested or withdraw? Also, please guide me where I should invest Rs 2-3 lakh for a period of around three years.

- M.Amarnath

You made a good selection. All these funds have a good record. But four-star rated funds are also “investment-grade”. Though the ratings have come down to this, they have been able to generate superior risk-adjusted returns. So, stick to your funds.

On your second query, you could consider investing the additional Rs 2-3 lakh in the same funds you already have. You have built up a sound portfolio and increasing the number of funds gives the burden of tracking more of them. Do remember not to invest all the money in one go. Rather, divide the money into your existing funds and spread the investment over six months to a year. You could also think of adding one debt fund to provide stability to your portfolio.

If long-term capital gains from equity are exempt from tax, then why is it not applicable to the New Pension System (NPS)?

- Niranjan Kumar Boora

Long-term capital gain from the NPS is taxable simply because the government has put it under the E-E-T regime which stands for Exempt, Exempt, Tax. This means the contribution and accumulation phase are tax-free and the withdrawal phase is taxable. There is an expectation that in the coming budget, the tax benefit will be extended to the NPS, to bring it at par with other long-term savings instruments, but we need to see if this happens.

From which date will Sebi’s new law on abolishing entry load take effect?

- Sudhir Mishra

The decision on abolishing entry load has already been taken on June 18 by Sebi. But this has not been notified; this regulation will come into effect only then.

My current investment portfolio is too tilted towards equities and equity mutual funds and the exposure to safe havens like bank fixed deposits, NSCs and PPF, is very limited. I want to balance my portfolio’s allocation between equity and debt. I have been told that debt funds are a better option as compared to bank fixed deposits. I am open to investing in debt funds for 2-5 years, but I want to ensure these investments do not erode my principal. Please guide.

- Himanshu Mehta

Debt funds do have an upper hand over bank fixed deposits in terms of liquidity and taxation. A debt fund is much more liquid than a bank fixed deposit which involves a lock-in and invites a penalty on premature withdrawal. From the taxation point of view, too, debt funds are more tax-friendly for long term investments. While the interest earned on a bank fixed deposit is added to an individual’s income and taxed as per the applicable slab, the long-term capital gain on a debt fund will be taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.

But no mutual fund gives guarantee of performance and there is no assurance that your capital will be safe. If you are completely averse to taking risk, a risk-free assured return instrument like a bank fixed deposit, NSC or PPF would be more suitable.

Value Research