In an interview with CNBC-TV18, Rustagi said, "It doesn't mean that sector funds, thematic funds or exotic funds do not have a place in the portfolio. Definitely, there is a place for these funds but not for someone who is beginning to invest, who is investing smaller contribution over a period of time. One can look at these funds maybe little later."
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: An investor is looking for a goal of around Rs 50 lakh in the next 20 years for which he has been saving Rs 25000-28000 per month. How should he allocate the money?
A: I think there are two important factors; one is that he is looking at building up a portfolio of mutual funds and second is he has a time horizon of around 15-20 years. He has also mentioned about his two goals, one of them is getting married and other one is retirement planning.
If we analyze these goals considering that he is around 27 years old, his goal of getting married would have a time horizon of maybe a couple of years and his retirement could be having a time horizon of 30 years.
During this period again, there will be other goals of maybe buying a house, children's marriage, children's education etc. We listed out some of the goals; each one then has to be then given a time horizon and then there is a need to quantify these goals.
This process basically helps him in deciding what kind of asset allocation should be there. As we know, mutual funds do offer different kinds of funds. There are debt funds, gold funds, equity funds etc. so the asset allocation decides what kind of asset classes he should be investing in. That is very important.
Then comes the question of deciding which fund because once you decide the asset allocation then he can look at which kind of option he should be looking at. That's where mutual funds, being a diversified investment vehicle, are very important.
Coming back to his two goals, getting married is a short term goal. He should be looking at tax efficient debt options and debt oriented hybrid funds like fixed maturity plan provided he is very sure about his time horizon.
The other option is monthly income plan (MIP). These are essentially debt oriented hybrid funds; they invest around 80-85% money in debt and the rest is invested in equity. Another option for him for this particular goal is short term debt funds.
As far as the long term goal is concerned, considering that he has a time horizon of around 25-30 years or even more, he can consider investing in equity funds. The key, ofcourse, will be that if he invests continuously on regular basis; that will help him in terms of averaging.
As far as short term debt is concerned, he can look at Birla Sun Life Dynamic Bond Fund . In terms of MIP, he can consider HDFC MIP long term or Reliance MIP . Fixed Maturity Plans (FMP) essentially are closed ended funds and mutual funds keep launching from time to time for different durations. It's difficult to tell a name at this stage.
As far as equity funds are concerned, my advice would be that core of the equity portfolio should be well diversified funds. I don't know what kind of holdings he has in equity portfolio. But for mutual funds, I will recommend that he should look at a well diversified fund like DSP Blackrock Top 100 . This is a fund which invests in top 100 companies in terms of market cap. Another fund he can look at is HDFC Equity and Reliance Equity Opportunity . These are three funds that he can start investing.
Q: An investor can invest Rs 12000 per month. He has invested in HDFC Growth Fund and ICICI Prudential Infrastructure Fund and ICICI Prudential Technology Fund and also in Reliance Diversified Power Sector Fund . How should he allocate the money?
A: There is definitely need to change the investment strategy here. Every investor who is looking to build up a corpus of a period of time needs to ensure that the core of the portfolio should be well diversified fund. Now it doesn't mean that the sector fund, thematic funds or these exotic funds do not have a place in the portfolio.
Definitely, there is a place for these funds in the portfolio but not for someone who is beginning to invest, who is investing smaller contribution over a period of time. One can look at these funds maybe little later.
As far as this portfolio is concerned, I think the portfolio is completely dominated by the thematic and sector funds so there is definitely need to change that. The focus should be more on the diversified fund. Some of the funds that can be looked at is like in place of infrastructure can be ICICI Focus; in place of Reliance Diversified Power, it can be Reliance Equity Opportunity . There is a definitely a need to change the portfolio.
As far as the insurance is concerned, he has two policies again. I would like him to realize that when it comes to insurance, risk cover is not about the number of policies, it's about the quantum of insurance that you have. I think he has a combination of a money back and endowment plan, which obviously is not going to give him adequate risk cover. He should definitely consider buying a term plan.
I think the third requirement is that he is looking at building up a corpus of around Rs 4 crore over a period of around 15-20 years. If I look at the time horizon, he can definitely look at equity funds because he needs to beat inflation. But the goals also have to be very realistic.
To achieve these goals over a defined time horizon, he needs to invest around Rs 85000 assuming annualized return of around 12%. I think there is a complete mismatch in what he can do, he is looking at basically investing Rs 12000.
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