I have some money that I plan to use after a month. Should I invest it in liquid funds instead of a bank Fixed Deposit for better returns?
- Rajesh Mendon
If safety of principal is of prime importance, stick to a bank FD. SBI currently pays interest at 3 per cent per annum on fixed deposits for a 30-day period. Although liquid funds have a tax advantage, their returns have subsided in the past two quarters. Their returns were much higher, more than 7 per cent, till last year, but they are unlikely to return more than 4.5–5 per cent per annum under the new norms that require them to invest in instruments with maturity of upto 91 days only.
Liquid funds returned 1.05 per cent and 1.11 per cent in the first two quarters of this calendar year. The difference in returns of the two will be marginal.
I had invested in Reliance Vision Fund more than a year earlier. For a fund to qualify as an equity one, it has to keep at least 65 per cent of its assets in equities, but according to the offer document of this fund, it has to keep only 60 per cent of its assets in equities. Will the gains be tax-free if I redeem now?
- Suman Chatterjee
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Yes, it has to invest a minimum of 65 per cent in equities to qualify as an equity fund. But this 65 per cent has to be arrived at by taking the opening and closing monthly equity allocation in the trailing one-year period.
Reliance Vision, according to its mandate, invests 60-100 per cent of its assets in equity. It is structured to behave like an equity fund and thus maintains the required allocation of 65 per cent. This fund is treated as an equity fund only and, hence, you need not worry on your long-term gains being tax-free.
Yearly review is suggested for funds' performances. What should be done when a fund’s grade is falling and over some period it has not been giving good returns? I have ongoing Systemetic Investment Plans (SIPs) in ICICI Prudential Emerging Star Fund. Should I cancel my SIP in this fund and continue them in ICICI Prudential Infrastructure Fund? Should I also switch my investments to the latter?
- Ramakant Deshpande
Selection of funds should be done on the basis of performance in the past three to five years. A fund should not be discarded if it performs badly for just a few months, or even a year.
However, if a fund has not been among the good performers for a considerable period of time, then you need to re-look at it. If you have SIPs going on, cancel and start these in other good funds. You may also consider redeeming existing investments to other good funds. For selecting new funds, do not restrict your choice to the same fund house. Look for other houses if good choices are not available in the same fund family. Switching will, in any case, be taxable within the same fund house as well.
ICICI Prudential Emerging Star is a mid-cap fund and, hence, is more volatile than an average diversified equity fund. The basic nature of the fund is such that it will outperform in booming markets and will fall harder during declines. While it has beaten the category from 2005 to 2007, when the going was good, it took a beating in the market crash last year.
If this is the only fund that you own, it is better that you shift to other diversified large-cap funds such as DSPBR Top 100, Reliance Regular Savings Equity, HDFC Top 200 and Sundaram BNP Paribas Select Focus.
Regarding ICICI Prudential Infrastructure, don’t make this fund a core holding, as it is a thematic fund. While its performance is good and it casts its lot with large-caps, you may allocate a small portion of your portfolio to this fund.
Value Research