Investing: Hemant Rustagi

I want to invest in equity mutual funds. Should I take the systematic investment plan (SIP) route or the lumpsum route? Which strategy works better?
Both have their advantages as well as disadvantages. If you are looking to build wealth over time by investing in equity funds but are feeling restricted in terms of money available for investment, an SIP can help you realise your goal. Apart from building a corpus through smaller contributions, you will benefit from “averaging” as the money will be invested at different market levels.

On the other hand, when you make a lumpsum investment, in a way you try to time the market. While this can give better returns than what you will get through SIPs in a rising market, SIPs will be more beneficial in volatile and falling markets. Since the stock market behaves differently over different periods, a combination of both would be ideal.

I have retired from service. I had invested Rs 2 lakh in a medium-term debt fund. However, the annual returns have been less than 2 per cent. I want to take out this money and invest elsewhere. I am looking at safety as well as returns of 8-10 per cent a year. Which category of funds will be ideal for me?
To earn an annualised return of 8-10 per cent in today’s market conditions, you will have to realign your risk profile a bit. You need some exposure to equity. A debt-oriented hybrid fund, like a monthly income plan (MIP), can fit the bill. MIPs are basically ultra-conservative balanced funds in which debt provides a steady return while the equity part enhances returns.

This asset mix, over a period of time, has the potential to provide returns that are more attractive than other options like fixed deposits and debt funds. At the same time, there is a possibility of fluctuations in returns in the short term due to certain market factors. The key, however, is to select the right fund in terms of exposure to equity.

For someone like you, the right choice will be MIPs that have capped their equity exposure at 10-15 per cent. If you are not comfortable with altering your risk level, you may opt for a short-term debt fund, which can give returns in the range of 6-6.5 per cent.

I want to know how much importance should be given to the level of portfolio diversification in an equity fund considering that a mutual fund itself is a diversified investment vehicle?
While it is true that a mutual fund, by its very nature, is diversified, it is important to have a close look at the level of diversification in an equity fund’s portfolio. Generally, it is the level of diversification that determines the kind of risk one is taking.

A well-diversified portfolio enables an investor to spread his investment across sectors and segments. The idea is that if one or more stocks do badly, the portfolio should not be affected much. A diversified fund, therefore, can be an ideal choice for someone who is looking for steady returns over the longer term. On the other hand, a concentrated portfolio works exactly in the opposite manner.

Though a fund with a concentrated portfolio has the potential to provide higher returns, it also increases one’s chances of underperforming or losing a significant portion of investment in a market downturn. Therefore, one must analyse the level of diversification in a fund so as to ensure that the risk attached to a fund’s portfolio doesn’t exceed one’s capacity to take risk.

Hemant Rustagi is the CEO, Wiseinvest Advisors. Send your queries at yourmoney@bsmail.in