Steer clear of thematic funds

I have invested in Templeton India Growth Fund - dividend reinvestment plan. With the direct tax code (DTC) coming in from 2012, the dividend is supposed to be taxed at five per cent. How can I save on this tax?

- Ganesh Kamath

Investing in the dividend option of mutual funds is popular, as it provides regular income, tax-free till now. Once the DTC comes in from April 1, 2012, the dividend option will attract a five per cent tax. More, in recent times, Sebi has directed all MFs to calculate dividends from realised gains and not at pre-defined times each year. This will reduce the dividend payout. To counter this, it is advisable for you to move to the growth option and redeem your holding units to meet your income needs. As these will be long-term capital gains, you would not pay tax on the gains.

I am 44 and have sufficient assets in real estate but very little in other asset classes. I have a surplus of Rs 50,000 per month and have a large risk appetite. Based on your recommendations, I have shortlisted some funds. Please advise if these funds are an aggressive enough selection to give high returns over a five to seven-year period?

- Vishwanath

At 44, you are a late entrant into equity investing. However, by selecting systematic investment plan (SIP) in mutual funds, you have made the right choice. In the time frame you are considering, equity mutual funds should offer good returns. You have also selected some good funds: with some changes, these should help you with high returns. However, the combination you have selected lacks the diversification and aggression needed from an aggressive investor. Also, by selecting three funds from the same fund house, you are compromising on diversity in style.
 

Current portfolio
Schemes	Returns* (%)
	3-year	5-year
Franklin India Blue Chip	13.55	13.48
DSPBR Top 100 Equity	11.73	15.42
HDFC Top 200	16.72	16.44
HDFC Equity	18.78	16.38
HDFC Prudence	18.32	16.52
ICICI Prudential Discovery	22.21	13.51
*Returns as on March 21, 2011

We are suggesting an aggressive portfolio comprising of six funds to you. Collectively, these have 80 per cent equity exposure with funds that have a proven record, as well as promise. By investing regularly in these, in a disciplined way, you will have a diversified portfolio, with funds that are aggressive and can earn you higher return. Make sure you invest regularly in these funds; you should also track performance periodically.
 

Suggested portfolio
Schemes	Returns* (%)
	3-year	5-year
AIG World Gold-G	-	-
BSL Dynamic Bond Ret-G	8.79	8.66
DSPBR Micro Cap Reg-G	13.62	-
Fidelity Equity-G	14.1	14.86
HDFC Equity	18.78	16.38
IDFC Premier Equity Plan A-G	15.81	20.02
*Returns as on March 21, 2011

Two years ago, I invested Rs 5,000 in Reliance Infrastructure new fund offer (NFO). The value of my investment has always been less than what I had invested. What should I do?

- Rishu Kumar Chourasia

This fund's objective is to achieve long-term capital appreciation by investing in infrastructure companies and those indirectly related to these sectors. These include investments in construction, metals and minerals, power and power equipment, telecom, banks, ports, and related areas in the segment. The fund can have 35 per cent of its assets in cash and fixed income investment.

Infrastructure as a theme has not been doing well and its impact is visible on the funds in this category. More, this fund's NFO was at a time when the infrastructure sector had not picked up as much as expected. So, the value of your holdings is less than what you had invested.

The lesson for you: never invest in thematic funds, unless you are very clear on the risks. For everything else, it is best to invest in a large-cap or multi-cap fund.

Also, invest in an NFO only if there is a compelling idea in the offering. There were a few funds in the infrastructure space that you could have considered instead of this fund, for they have a performance history and track record to consider.

Value Research