I am a government employee and want to start a Systematic Investment Plan (SIP) of Rs 3,000 per month for 15 years. I am a bachelor who has neither great assets nor responsibilities. I have thought of investing in one of the equity diversified funds like IDFC Premier Equity A, ICICI Prudential Discovery, ICICI Prudential Dynamic or HDFC Equity Fund.
-Sunil The funds you have listed are good in quality. But, funds such as ICICI Prudential Discovery and IDFC Premier Equity are mid-cap funds, riskier than pure diversified equity ones. Such funds should not form the core of your portfolio. Both HDFC Equity and ICICI Prudential Dynamic are good multi-cap funds which invest in stocks across market capitalisation. In case you do not have any other ongoing MF investments, then you may invest in any of these multi-cap funds or any other good large-cap fund. Else, you may invest in mid-cap funds but limit your holdings to 15-20 per cent.
You advice investors to invest in diversified funds like HDFC Top 200, DSPBR Equity and Magnum Contra. However, there are funds like ICICI Prudential Discovery Fund, Reliance Pharma and Tata Life Sciences & Technology Fund that are miles ahead in performance. Why don’t you recommend these? These funds have not just performed well in a single quarter but seem to have done well even over different date ranges. How does one decide which fund to buy?
-Praveen When we recommend core funds, we look at a number of aspect. We believe that core holdings should be large-cap, diversified equity funds. Other category of funds like mid-cap fund (such as ICICI Prudential Discovery, where only 30 per cent of the portfolio is in large cap stocks), a sector fund (such as Reliance Pharma) or a thematic fund (such as Tata Life Sciences & Technology) cannot be your core portfolio. Such funds are susceptible to greater volatility than their diversified, large cap counterparts.
When we look at performance, we do not just consider the last quarter or even the last year. We look at consistency over the years. We also take into account how the fund has fared over market downturns and rallies.
Funds that can generate superior long-term returns (when compared to the category average) with limited volatility should form the core holdings of a portfolio, accounting for an allocation of no less than 60 to 80 per cent.
Is income from Monthly Income Plans (MIP) taxable?
-Maria Gokhale For income tax purposes, MIPs are treated as a debt fund. An investor receives income from MIP by way of dividend. This income attracts dividend distribution tax (DDT), which is tax-free in the hands of the investor. However, this is paid by the asset management company. The quantum of tax is 14.16 per cent of the amount of dividend declared.
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