I have suffered a capital loss of 22-28 per cent on my investment in balanced funds. As per the objective, one should at least expect them to minimise the overall loss, if not protect the capital. Please advise whether one should keep balanced funds in my portfolio. I have been investing in DSPBR Balanced, HDFC Prudence and Magnum Balanced since last two years.
- Jagannath Babu
Investing in balanced funds help in steady growth. Their inherent design allows them to maintain an effective balance between debt and equity. This makes them a suitable vehicle for long-term growth.
Balanced funds can also shift between asset classes depending on the market condition. Although they may not rise as much as equity funds during bull markets, they are designed to cushion the downside better. Last year, an average equity diversified fund had shed 55 per cent, while an average balanced fund lost 41 per cent. So, erosion in balanced funds is less than equity funds.
Apart from this, balanced funds provide the benefit of automatic rebalancing. Also, there is no tax implication in good times. Such funds are treated at par with equity funds for tax purposes. So for pursuing long term growth, you should continue with your investments in balanced funds.
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If I invest Rs 20,000 in a tax saving fund, how much tax will I save? Are there any cap on investment in equity linked savings scheme (ELSS)?
- Ajay Sengar
Currently, there are no caps on the investment in ELSS. You can invest up to Rs 1 lakh in the ELSS to save tax.
Under Section 80C of Income Tax Act, an individual gets a deduction of up to Rs 1 lakh for investments in Equity Linked Savings Scheme (ELSS) or any such instrument that is eligible for deduction under this section. Today, a person is free to decide how he wants to exhaust this limit. In the past, there were several caps for different instruments.
Earlier, ELSS investment was eligible for a rebate under Section 88. The amount of rebate was based on an individual's income. If the gross total income was less than Rs 1.5 lakh, a 20 per cent rebate was applicable. Between Rs 1.5 to Rs 5 lakh, 15 per cent rebate was applicable. For income above Rs 5 lakh, Section 88 was not applicable. Also, the maximum investment in ELSS allowed was Rs 10,000.
It is a general perception that Gilt funds invest primarily in the Government of India (GOI) bonds and secured deposits (banks and companies). If this is true, then why have these funds gone down 5-8 per cent on January 7, 2009 when the market went down 7 per cent following the report of fraud in Satyam Computers?
- Saroj Mati
The fall in the return of gilt funds on January 7, 2009 was not related to the Satyam fraud. It was due to a rise in the 10-year GOI securities' yield that stemmed. It jumped because the government announced a $10 billion additional borrowing plan on that day.
At the beginning of the year, bond yields had fallen sharply on expectations of interest rate cuts. On January 7, the announcement led to a sharp reversal in the bond yields. Since bond yield and its price are inversely related, the rise in yield resulted in a fall in bond prices.
In the past few months, the interest rate has fallen quite a bit and the future interest rate outlook is hazy. The yield of G-Secs is not a smooth line. They are very sensitive to interest rate change. The above incident proves the volatility of gilt funds.
I have been investing in L&T, RIL and SBI shares regularly in the last few months. I have never invested in stocks directly before. Is it advisable to continue investing in shares directly or should I invest in Birla Sun Life Frontline Equity & HDFC Top 200 through Systematic Investment Plan (SIP)?
- Kiran Nijher
It's a matter of choice. It depends on the time you can spend on managing your investment. If your shares selection has a basis, which you believe in and you can stick to, then could be a good idea as well as cost effective too.
But there is more to investing than picking three quality stocks and investing in them regularly. You will have to worry about the portfolio weights and add more stocks for adequate diversification. Tax implication is another important factor.
Investing in mutual fund is recommended as it gives an investor convenience, professional management, diversification, and tax efficiency.
The interest rate on fixed deposit does not change during the tenure of the investment. Does the same thing apply to debt funds as well? If not, is it advisable to opt for a short-term debt plan as deposit rates are falling?
- Sachin Mehta
Unlike fixed deposits, debt funds are not risk-free assured return instruments. They are affected by interest rate fluctuations. Falling interest rates will result in rising prices of the underlying bonds, while rising interest rates will result in falling bond prices. So debt funds do better in a falling interest rate scenario.
The higher the maturity profile of a debt fund, the more is its sensitivity to interest rate fluctuations. So short-term debt funds are less affected by interest rate outlook than long-term debt funds. Liquid funds would be a better option as they invest in short-term instruments such as treasury bills, certificates of deposits and commercial papers.
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