SIP long-term gains

I am 28 and have Rs 5 lakh to invest for the next 18-20 years. Please suggest mutual funds where I can invest this amount.

- Vijay Bhaskar Reddy

Investing for the long-term is best accomplished with systematic and regular investing. You should be looking at investing the Rs 5 lakh that you have systematically and not in a lumpsum. If you have never invested before, start doing so in a balanced fund such as HDFC Prudence or Reliance Regular Savings Balanced Fund.

Invest in these for about six months, via the systematic investment plan (SIP) route to experience mutual fund investing. After six months, when you are more familiar with investing, move to a large-cap fund such as DSPBR Top 100 or IDFC Imperial Equity Plan A. You should also consider parking your Rs 5 lakh savings into a liquid fund for better realisation.

I would like to know about the risks regarding investments in FMPs.

- Anirban

Fixed maturity plans or FMPs are close-ended in nature. Two significant risks to which FMPs are exposed to are interest rate risks and credit risks. FMPs are actually designed to immunise investor against interest rate risk. However, as a plan is launched and money is collected, interest rates can fall before the money is invested and the funds will have to be invested at a lower rate. The non-availability of a forward rate market in India is a chief contributor to interest rate risk in an FMP.

The credit portfolio in the plan can suffer in case of downgrades by rating agencies. Downgrades bring down the price of the securities, as investors demand a higher risk premium on the asset, leading to higher credit spreads. If the fund manager is forced to liquidate the security if it crosses a threshold rating level, the scheme will suffer capital loss.

Hence, FMPs have potential for capital depreciation and investors should take a closer look at the risks before making an investment decision.

I am 30 and want to start an SIP of Rs 1,000 each in five or six purely equity-based schemes. I have a lumpsum investment of Rs 10,000 each in Tata Infrastructure and Reliance Diversified Power for the past three years. I believe in high risk and high returns; please suggest accordingly.

- Tausif Mushtaque

Your current investments are in funds with a narrow investment mandate such as power and infrastructure, which reflects your aggressive investment stand. Such investments pay off well if closely monitored, as you need to redeem such investments to profit and earn high returns. At Value Research, we believe in investing systematically for long-term wealth creation. We feel this can be achieved by disciplined investing. You can do so with a core and satellite portfolio allocation into funds that will offer both stability and the necessary upside to the portfolio. This way, the investments have the ability to absorb shocks as well as have the potential to earn higher returns over various market cycles.

I am confused in selecting between the growth and dividend option when investing in a mutual fund. Which one should I go for?

-Sriram V

A good way to address your confusion is to check your financial needs. If you need regular payouts from your mutual fund investment, you should choose the dividend plan. If you can hold on to your investment for a longer period, you should choose the growth option.

In a growth plan, the gains made by the scheme are reinvested. Hence, the net asset value (NAV) moves up. In a dividend plan, the gains are periodically distributed as dividend. So, the NAV drops to the extent of the dividend, whenever it is paid out. There is also the dividend reinvestment facility in which you can put the dividend back into the scheme, buying some more units.

Value Research