Investing: Paras Adenwala

I have been saving money for my sister’s wedding for a few years now and have managed to create a corpus of Rs 2 lakh. The wedding is in January 2011. Since I still have a few months, I want to invest the money until then. I have heard that fixed maturity plans (FMPs) give the highest returns in debt funds. I want to know how safe are these plans and the returns offered? Also, what will be the tax implications?
FMPs are a good alternative to banks’ fixed deposits (FDs). These offer better tax-efficient returns than FDs. However, an investor in an FMP must hold the investment until maturity, unlike FDs where one can withdraw any time. FMPs became safer after new rules were laid down by the regulator. One can safely get eight per cent returns for a one-year FMP. The dividend declared by an FMP is taxed at 12 per cent and is payable by the mutual fund.

I am 35 years old and have invested in five thematic funds — infrastructure (two), banking & financial services (two) and auto (one). While the banking, financial services and insurance, and auto-theme funds are doing well, the performance of infrastructure funds is disappointing. Is this theme promising in the long run? Or should I exit the infrastructure funds and consider another sector like public-sector undertakings?
A reason for the underperformance of infrastructure funds is that many companies in this segment have witnessed slow growth, despite a huge order-book position, owing to delays in execution. Several companies, with the help of the government, are working on improving their execution cycle, expected to start yielding results soon. An improvement in the execution cycle will augment the growth rates of these companies, which in turn will improve their stock market performance. Hence, your current investments in the theme be maintained.

Further, you may want to review your strategy of investing in a basket of various thematic funds. Thematic funds do well till the business cycles support such themes. However, they lose their lustre after the business cycle has peaked. It is a proven fact that diversified funds outperform thematic funds over the long term.

Recently, a brokerage house launched an equity systematic investment plan (SIP). I feel it is a good way to build your stock portfolio, especially in largecap or public-sector undertakings from a long-term perspective. Do you endorse this view? How should I select the stocks?
Stocks are good buys at a certain price, and good sells at yet another price. Hence, stock portfolios are always dynamic, making SIPs in stock portfolios difficult. SIPs work the best in a mutual-fund product. Moreover, investors will do well to accept that portfolio management is a full-time job, and hence, it is best that they retain the services of experts to manage their portfolios.

The writer is managing director & principal portfolio manager, Capital Portfolio Advisors. Send your queries to yourmoney@bsmail.in