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I am a direct investor into mutual funds (MFs). I recently shifted from Delhi to Kolkata and need to update my address in my know-your-client (KYC) records. I went to one of the KYC points of services (POS) listed on the Association of Mutual Funds in India’s (Amfi) website. I was told that they will take my KYC application if I invest some amount with them. When I asked further, they said the Securities and Exchange Board of India (Sebi) rules have changed and only an asset management company can forward KYC requests. Later, I realized that other than CAMS and Karvy, the rest of the names on the Amfi list were of MF distributors. Why does the website of CVL India, the authority set up for storing KYC information, spits out a blank excel sheet in the name of KYC POS. How can I get my address updated?

—Anindya Bera

KYC regulations have gone through an evolutionary process over the past few years. In general, it requires an MF investor to register with a central database by providing his/her Permanent Account Number, name, address and a few other details. When these particulars (especially address) change, the investor is required to submit a change request to update the registry. The purpose for this registration, ostensibly, is to prevent money laundering by ensuring that people are making investments on their own behalf.

When it started out, this registration was required only for people investing above Rs. 50,000. It was then expanded to any amount for certain categories of investors such as non-resident Indians or online investors. In January 2011, it was made mandatory for all MF investors to get registered. Finally, in January 2012, Sebi made a significant overhaul to the process.

Until December 2011, there was one registrar for KYC and that was CVL India. They authorized POS across the country to accept applications (both fresh and change requests), do preliminary processing and issue acknowledgements. Starting January 2012, however, all the POS were cancelled (which is why the CVL POS list is empty) and only Sebi-authorized intermediaries such as brokers and MF companies were allowed to process KYC. Also, they were allowed to process them only for their customers (which is why you were asked to invest). Sebi did this to ensure there would be multiple registrars (not just CVL).

This brings us around to your situation. CAMS, Karvy (as authorized operating back office units of MF companies) and MF company offices themselves are the only places where you can get your KYC updated under the current regulations. The best course for you would be to see which MF company you are holding a folio in and go to their office to submit your KYC change request. They should not ask for an additional investment since you are already their customer.

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I invest in DSP BlackRock Top 100, HDFC Top 200 and UTI Dividend Yield. Will it be wise to stop my systematic investment plan (SIP) in Birla Sun Life Frontline Equity and switch to Birla Sun Life Dynamic Bond Retail Growth? I want some exposure to debt funds, which would give some positive returns in the current market conditions. Is it better to invest in debt funds in a lump sum or SIPs? As I am investing in HDFC Equity, I want to exit Reliance Regular Savings Equity. Is my decision correct?

—Susnata

The question of whether to shift from an equity fund to an income (debt) fund should be driven by your investment time frame. If you would need the money within the next three years, it would indeed be a wise move. If not, ignore the notional losses in your portfolio and stick with the equity fund. Birla Sun Life Frontline Equity is a well-managed fund that has consistently done well in its category over the years.

Debt funds are more suited for lump sum investments since the notion of cost-averaging (one of the primary benefits of SIPs) is not very relevant to them. But one can consider SIPs in debt funds for benefits such as disciplined investing.

Finally, both the multi-cap funds that you are referring to are similar funds that have done well over the long term. Having one of them in your portfolio would be enough.

I am 26 years old and want to save Rs. 8 lakh in four years. I will be comfortable with SIPs. I am willing to take risk. Right now I have an SIP in HDFC Tax Saver. Please advise.

—Indrajith

To create a corpus of Rs. 8 lakh in four years, you would need to invest about Rs.13,500 a month over this period, assuming a little less than 12% return annually. Typically, for such a relatively short time frame, a portfolio that is equal parts of equity and debt would be good. But since you are young and have indicated that you can take risk, you could take a chance on an all-equity portfolio. A portfolio that is anchored in large-cap-oriented funds book-ended by mid-cap funds on the riskier side, and equity-oriented balanced funds on the less risky side would be a good. For example, you could invest 50% of your monthly SIP in two large-cap-oriented funds such as Franklin India Bluechip and UTI Dividend Yield. The remaining 50% could be split between a mid-cap fund such as IDFC Premier Equity and an equity-oriented hybrid fund such as Birla Sun Life 95. Invest in the growth option of the schemes.

Remember to stay invested through the SIP tenor. Over the next four years, there are likely to be times where the markets test your investment resolve by taking a dive. You should stay steadfast and keep investing as those times represent the opportunity to get more units at a good value. Consistently investing into a well-designed MF portfolio over several years can yield good returns.

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Are there MFs that have equity derivatives (not only for hedging but for leveraged portfolio creation so that the fund can benefit even from a falling market). I could only find ones that use derivatives for arbitrage.

Nishanth Salian

Although the Securities and Exchange Board of India (Sebi) has allowed MF managers to use equity derivatives in their portfolio, you are right in observing that they use it primarily for defensive purposes. There are a few funds that carry “derivative” in their names, but only for hedging. It would be safe to presume that there aren’t any equity-oriented funds that use derivatives to enhance returns.

However, there are a few debt-oriented hybrid funds that use derivatives in the equity part of their portfolio. Typically, these are capital protection-oriented schemes that come with a lock-in period. After protecting the capital with an 80-90% investment in debt securities, the remaining corpus is used in a leveraged manner in the derivatives market. If these investment bets deliver, such a scheme would outperform similar schemes that invest the risk capital purely in the equity market.

I want to invest in gold exchange-traded funds (ETFs). How can their performance be analysed. Which is better—gold ETF or gold fund of funds (FoF)? I don’t need to convert money into physical gold. Is a gold ETF or gold FoF safer and better than any equity fund over 3-5 years. What are the tax implications?

—Krunal Sanghvi

Gold ETFs are an ideal way to buy gold for investment. It avoids storage/security issues and the growth in value is taxed beneficially compared with physical gold. Since gold ETFs are passive instruments, there is not much fund management-related performance to worry about. The only issue is the tracking error—the deviation that the fund returns show from that of gold prices. Tracking error is a factor of a fund’s management expenses as well as the small percentage of cash that a fund keeps to meet redemption needs. This information is provided in periodic updates about the schemes.

Gold FoFs, unlike gold ETFs, are regular mutual funds (MFs) that can be bought without a demat account. They transact in units of a particular gold ETF. There is an additional, albeit small, cost associated with FoFs. In an FoF, one can open a systematic investment plan (SIP) and can hold fractional units, which isn’t possible with ETFs. So you can use gold ETFs for lump sum and gold FoFs for SIP investments. Both gold ETFs and FoFs are treated as debt funds for taxation.

As a choice of investment, gold—in whatever form—should not form more than 10% of a long-term portfolio since as an asset class it is a relatively conservative option. For a period of 3-5 years, you can increase this allocation to about 20-25%, but ideally, you should have a balanced portfolio that has equity and debt components as well.

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I am 23 years old and I have been investing Rs1,000 each month in Kotak 50 Equity Scheme Growth, Reliance Equity Opportunities Fund Retail Plan Growth, Tata Infrastructure Fund Growth, DSP BlackRock Top 100 for the last 20 months. I will need Rs1 crore at the age of 50. Are these investments sufficient?

—Manish Gound

You have 27 more years to achieve your goal. When you are establishing a monetary target over such a long term, it would be better to do so in terms of today’s money by factoring inflation. In your case, for example, an amount of Rs1 crore in 27 years would be worth about Rs12.5 lakh in today’s value, assuming an 8% average inflation rate. Conversely, you would need Rs8 crore in your corpus in 27 years to realize the equivalent of Rs1 crore today. This is the arithmetic that you need to use to establish a correct target value for your goal.

Once the target value is properly established, from an investment perspective, you need to figure out how much to invest periodically to reach that value (assuming an average annual growth rate). For example, if you assume an annual growth rate of 12%, to reach a target of Rs1 crore, you need to invest about Rs4,000 a month for the next 27 years. To achieve a target of Rs8 crore (or Rs1 crore in today’s valuation), you need to invest Rs30,000 a month for the same period. Depending on your affordability, you can start investing a sum of money today and, over the period of your investments, increase it. In your case, for example, you can start with Rs4,000 a month and increase the monthly amount by Rs2,000 every year for the first 15 years to reach a target of Rs8 crore in 27 years.

It is at this point—after establishing the time frame, target and investment amounts—that we should look at the portfolio and identify where to invest. Ideally, one would want to invest in well-diversified and well-established funds that yield a low-maintenance portfolio. For this purpose, it would be best to avoid thematic funds while designing the portfolio. Your portfolio could start off with DSP BlackRock Top 100, ICICI Prudential Focused Bluechip, Reliance Regular Savings fund (Equity) and HDFC Mid-cap Opportunities Fund. While such a portfolio will not require much maintenance, it will require a review once every couple of years to ensure that growth towards your target is on track.

Srikanth Meenakshi, founder and director, FundsIndia.com

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I invest in HDFC Top 200, Birla Sun Life Frontline Equity, DSP BlackRock Top 100, ICICI Prudential Dynamic and Sundaram Select Midcap. I will remain invested for at least 15 years. Are these funds good? What about sector-specific funds?

—Prakash

You have a pretty good portfolio stocked with proven, well-rated funds. Even the Sundaram Select Midcap fund, the only fund that you hold that is not in the Mint 50 list, is turning around its performance. Having said that, one can’t say for sure if these funds will continue to remain on top of the heap over a period of 15 years. It would be prudent to review your portfolio at least once every couple of years to ensure that the funds still merit a place in your portfolio.

Regarding sector-specific funds, they belong more in a tactical portfolio designed to take advantage of specific economic or industry situations. Investing in the banking sector based on the interest rate scenario would be one such example. Such funds should occupy a small portion of an investor’s portfolio and only in situations where the investor has a particular, well-informed reason to invest in them. Also, it would be important for an investor to define an exit criterion for such investments and stick to it. Long-term portfolios are better built around well-diversified funds that are sector agnostic.

I am 26 years old. I have never invested in mutual funds (MFs). How can one find which fund will be good for 15-20 years and for three-four years?

—Harish

MFs are good investment vehicles for first-time investors. A prudent approach would be to put the fund selection step at the end of the decision-making process. The first thing is to analyze one’s investing capacity and time-frame. Based on these, an overall asset allocation profile should be developed. After this, appropriate funds should be selected in the asset classes identified.

You have mentioned two time-frames—three-four years and 15-20 years. The asset allocation profiles for these two periods would be significantly different. While you can take more risk and hence higher equity exposure in your long-term portfolio, you should be conservative with your short-term portfolio. Equity funds should dominate the more risky portfolio while debt funds and hybrid funds should feature in the less risky portfolio. Once such a plan is in place, selecting the schemes themselves would be a cinch—you can simply consult the Mint 50 list of schemes and pick the ones from the appropriate category of funds that you have identified.

This can easily be managed by individual investors themselves. However, if the initial steps appear overwhelming and you feel the need for a helping hand to get started, you would do well to approach an independent financial advisor, especially for analyzing your financial profile and planning for your goals.

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I am 33 years old and invest Rs5,000 through systematic investment plan (SIP) in HDFC Top 200. Is there any right time for SIP-based investments? I can stay invested for 5-10 years. I want to open another SIP of Rs8,000. Where can I invest?

—Yusuf

A mutual fund (MF) investment enables an investor to achieve diversification across products easily at a low cost. Similarly, systematic investing enables an investor to achieve diversification across time in an easy and convenient manner. It frees an investor from having to make judgement calls on whether the market or an investment product is currently over valued or not. Given this, there is really no bad time to start an SIP, especially when the time horizon is long. Also, SIPs enable you to invest in sync with your cash flows (monthly income translates to monthly SIP investments, for example).

You are currently investing in a large- and mid-cap fund, which is a premier fund in this category. That was a good place to start. You can expand your portfolio by buffeting it on both sides of the risk spectrum in terms of MF categories. You can invest the additional Rs8,000 in a pure large-cap fund on one side, and a small- and mid-cap fund on the other. You can choose a bluechip fund from either Franklin India or ICICI Prudential for the large-cap selection. For the small- and mid-cap fund, you can go with IDFC Premier Equity Fund.

I am 62 years old. I have a fixed deposit (FD) of Rs4 lakh. I want an alternative investment of Rs2 lakh. I want on invest Rs50,000 in a tax-saving MF. I want to invest the remaining amount in SIPs. Considering that I am a senior citizen, which MF should I buy?

—Ashutosh Chaudhary

While designing on asset allocation pattern for an MF portfolio, it is important to take a holistic view of the investor’s assets. Since you are already investing two-thirds of your overall portfolio in fixed income assets, we can recommend putting the remaining part of the allocation in equity-oriented funds. You have already indicated that one-fourth of this remaining money would go to a tax-saver fund; choose between HDFC Tax Saver and Religare Tax Plan.

Given the debt component in hybrid funds, your overall portfolio would have about 70% debt and 30% equity and that is a fair asset allocation for your profile.

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I am 27 years old and plan to invest Rs. 2 lakh in tax-saving equity-linked mutual funds (ELSS). I want my portfolio to have maximum large-cap funds, followed by mid-caps. I don’t want any debt in my portfolio. Which funds should I pick?

Suman

One can invest as much as they wish in an ELSS, but the tax exemption benefit will be limited to Rs. 1 lakh. Plus, this limit also includes other tax-exempt investments such as provident fund and home loan principal repayments. So if tax exemption is a goal, you would need to work within this limit and identify how much to invest in ELSS. Once you figure out the amount, you can invest in funds such as HDFC Tax Saver and Religare Tax Plan. Though these funds are broad-market funds—they invest across all segments of the equity market—they are generally oriented towards the large-cap segment.

For the amount that remains after this investment is made, you can consider a portfolio as you suggest—focusing on large-cap funds with some exposure to mid-caps. You can invest in a ratio of 70:30. Funds like ICICI Prudential focused Bluechip and Franklin India Bluechip are good choices in the large-cap segment, while DSP Black Rock Small and Mid-cap fund and HFDC Mid-cap Opportunities are good mid-cap funds.

I have been investing Rs. 5,000 per month each in DSP BlackRock Top 100, Franklin India Bluechip, ICICI Prudential Focused Bluechip Equity and Franklin India Index NSE Nifty. I want to invest another Rs. 6,000. Where should I invest? Are these funds good for long-term goals?

Gauri

All the funds you are currently investing in are pure large-cap funds—they invest only in very big companies. Historically, such stocks tend to be less volatile and more stable but they also tend to grow slower than small- or medium-sized companies. Hence, you would do well to complement your portfolio with funds that invest in the rest of the stock market. Funds such as IDFC Premier Equity fund and HDFC Mid-cap Opportunities are good choices.

Once you invest your extra money in this sector, you will have a total monthly outflow of Rs. 26,000, out of which Rs. 20,000 or 77% will go into large-cap funds. This is still quite a large allocation. Also, since the current funds you are holding are all of the same category, it is likely that there will be a bit of overlap between them in terms of the stocks they are holding. So you should move one of your current investments (one of the two Franklin funds can be considered) to another small/mid-cap or a multi-cap fund such as Quantum Long-term Equity Fund. Then, you will have about 60% of your portfolio in large-caps and the rest would be distributed among the growth segments of the market.

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I am 39 years old. I have invested Rs. 3 lakh in HDFC Liquid and have a systematic transfer plan (STP) to HDFC Top 200 and HDFC Equity of Rs. 7,500 each. I have also put Rs. 1 lakh in DSP BlackRock Liquid and have an STP with DSP BlackRock Micro Cap, and Rs. 1 lakh in ICICI Liquid and an STP to ICICI Prudential Dynamic. I also have a systematic investment plan (SIP) of Rs. 4,000 in IDFC Premier Equity and SIP of Rs. 1,500 in HDFC Prudence. I have Rs. 3 lakh to invest. Should I buy a good UTI liquid fund and do an STP to UTI Opportunities?

—Vipul

Considering SIPs and STPs, you are investing about 33% each in large-cap and mid-cap-oriented funds. The remaining money is split between an equity-oriented balanced fund and a multi-cap fund. The funds that you have chosen are all solid funds with a good track record. Your choice of fund for the additional investment is a large-cap-oriented fund, which is well-rated. UTI has several funds in this segment that are top-rated, including funds such as UTI Dividend Yield and UTI Equity. Regarding the liquid fund, UTI Money Market would be a good choice.

I have the following investments: HDFC Balanced (Rs. 50,000), Kotak Gold Fund (Rs. 50,000), IDFC Premier Equity (Rs. 2,000 per month), Mirae Asset India Opportunity (Rs. 1 lakh), Birla Sun Life 95 (Rs. 35,000), HDFC Equity Fund (Rs. 35,000), Rs. 10,000 per month in recurring deposit, Birla Sun Life Ulip Platinum Plus 3 (Rs. 1.8 lakh). Are my investments on track?

—Gireesh

A good financial plan has to have a well laid-out timeline for financial goals and asset allocation plans, selection of good investment instruments according to these plans, and an investment method that suits both the type of investment and the investor’s income flow. For example, if an investor has goals for a home purchase (say, in seven years), kid’s education (say, in 10 years), and retirement (say, in 20 years), three portfolios of good MFs would be needed that conform to the asset allocation plans for each of these goals. The investor can invest in these schemes either systematically (preferred) or in periodic lump sums depending on cash flow.

Coming to your investments, your MF portfolio has schemes with good track records. You are augmenting it with debt investments in the form of a recurring deposit, which is good. However, you need to place these in the context of financial goals and the timelines. Also, the method of investing needs to be consistent across the portfolio. Currently, you have one SIP in a mid/small-cap fund, but the rest have been made as lump sum investments. I would suggest you figure out a high-level financial plan.

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I am 32 years old and looking for equity mutual funds (MFs) that can give me good returns. I have Rs. 1 lakh in cash and want to make use of this fund. I can also invest Rs.15,000 per month. How should I build my portfolio?

—Pradip Kumar

Even if you have a lump sum to invest, it would be a good idea to deploy it systematically over a period of time. You could start a systematic investment plan (SIP) for a year for Rs. 25,000 a month to include the money from your lump sum. After a year, depending on your situation, you could reduce it to an affordable level by reviewing your portfolio.

Regarding your portfolio, you can allocate 50% of your funds to large-cap funds such as Franklin India Bluechip and ICICI Prudential Focused Bluechip. The remainder of the portfolio can be split between broadly diversified funds such as HDFC Top 200 and DSP BlackRock Equity and small/mid-cap funds such as IDFC Premier Equity fund. Such a portfolio will give you a broad coverage of the market with best-of-breed funds from different fund houses.

I have been investing Rs. 2,000 in SBI Magnum Contra since last year through an SIP. Recently, I started SIPs in HDFC Top 200 (Rs. 2,000), ICICI Focused Blue Chip (Rs. 2,000) and HDFC Mid-cap Opportunities (Rs.2,000). Is my portfolio on track or should I stop SBI Contra SIP and invest in another fund? I want to invest another Rs. 2,000 per month. My time frame is at least 10 years.

—Sunil Bhelawe

Your portfolio is pretty good as it is, but the fact that there is a fund that could get replaced and another fund that needs to be added gives us an opportunity to make it better. Currently, you are investing 75% of your portfolio in large-cap-oriented funds and 25% in the mid/small-cap sector. Given that the investment horizon of your portfolio is at least 10 years, you could afford to take in a little bit more risk in your portfolio. You can do this in the form of adding a good multi-cap fund such as Quantum Long Term Equity Fund. To replace SBI Magnum fund, you can choose another fund in the same category such as UTI Equity or ICICI Prudential Dynamic.

When you make these adjustments, it will result in a portfolio that is 60% in large-cap-oriented funds, 20% in a multi-cap and 20% in a mid- and small-cap-oriented fund. With a sound choice of schemes, this portfolio can be held for the long term.

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I am 24 years old. I want to invest Rs. 8,000-10,000 in mutual funds for 20-25 years. Should I take the dividend, dividend reinvestment or growth option?

—Harish

The three payment options are used for different purposes.

The payout option is used by investors who require a regular stream of income. Typically, this option is used in the case of debt funds, in which periodic dividends are declared. In the case of equity funds, since dividends are declared at the discretion of the fund manager, this option does not guarantee a regular stream of income and hence is not used as often (except in the case of tax-saving funds).

The reinvestment option is used to reduce the capital gains on the investments since the profits in the fund are extracted out as dividends, leaving the net asset value (NAV) of the fund without much appreciation. This option when used with debt funds where the dividend distribution tax levied is likely to be less than the marginal income-tax rate of the investor, will potentially reduce the overall tax burden of the investor. While it will have the same effect on equity funds as well, since dividends on equity funds are much less frequently declared, it will be relatively minimal.

The growth option implies no dividends at all. All the profits of the fund are retained by the fund manager for further growth of the corpus of the fund through investments.

In your case, given that you are planning to stay invested for 20-25 years, it is likely that you will invest predominantly in equity funds. Even if you invest in debt funds, long-term tax consequence (with the benefit of indexation) is likely to be minimal. Hence, it would be best if you stay with the growth option.

Also, since the proposed direct taxes code plans to impose a 5% dividend tax, it would be all the more prudent to stick with the growth option.

What are green MFs? Do they operate in India?

—Debasis

Internationally, over the past few years, investments in the alternative energy industry have attracted the attention of fund managers—in private equity as well as MFs. Investors go for these funds because either they want to participate in a newly emerging growth industry or they want to feel that they are “contributing” to the emergence of green energy. Unfortunately, such funds have not done too well internationally in terms of performance. One possible reason is that this is a capital-intensive industry and the global credit crunch over the past few years has not been good for it.

Probably for this reason, there are no funds that are specifically focused on alternative energy industry in India. Infrastructure funds and broad power/energy funds invest in green energy companies in addition to traditional infrastructure/energy companies.

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