Remember the story about the race between the hare and the tortoise? The hare ran very fast but lost out because he decided to take a break. The tortoise won because although he was slow, he moved steadily towards his goal. Investing is no different. You may invest in a lucrative avenue but if you stop midway, you may miss out on the rewards.
And what fantastic rewards they have been. Systematic investment plans (SIPs), where a fixed amount is invested in the scheme of your choice on a pre-determined date of each month, have yielded phenomenal returns in the past five years. Here is a simple calculation: if you had started investing Rs 1,000 every month in the Magnum Contra fund in January 2002, your investment would be worth Rs 2.8 lakh today, an annualised return of almost 55%.
Many people fall into what can be called the lumpsum trap. They feel that Rs 1,000 a month is too puny an amount to be invested and wait till they have amassed a sizeable sum to invest. But that can dent your returns quite badly. For instance, if instead of making monthly investments of Rs 1,000 you had waited till the end of each year to invest Rs 12,000 in a lumpsum in the Magnum Contra fund, your investment would be worth only Rs 2 lakh. That’s an opportunity loss of Rs 80,000.
Then there are those who are too preoccupied or just plain lazy to write out a cheque every month or so. For them, SIPs are a godsend opportunity to make money. The money is debited from their bank account on the given day and invested in the fund. No filling up forms. No going to the broker. No trying to time the market.
That, in fact, is the bane of many investors. They wait in the hope of entering at the “right time” so that they can maximise their returns. They forget, however, that it is not the time when you enter the markets but the time you spend in there that determines your returns. As the second MONEY TODAY-Value Research list of best funds shows in the following pages, the longer the tenure of the investment, the higher the returns. In seven out of the nine equity diversified, tax plans and balanced schemes, the five-year annualised returns were higher than three-year and one-year returns.
This also explains the fat returns from equity-linked savings schemes (ELSS). The three-year lock-in period means that fund managers have the assurance that the money they have invested in long-term bets will not be recalled by investors in a hurry. This freedom from fear of redemptions is one reason why ELSS funds have on an average given higher returns than even diversified equity funds in the past three years. In fact, the ELSS category has been the second best performer in the past three years, beaten only by tech funds.
But high returns alone do not make a fund good or worth investing in. What counts is the stability of returns and how well it protects capital when the going gets rough. Our list of best funds is not based on arithmetic alone. Consistency of strategy, quality of holdings and even the fund manager's tenure in the fund house are some of the ingredients of this subjective soup.
“A portfolio of 5-6 well chosen funds can offer you comprehensive financial planning,” says Bharat Bhushan, CEO of Money Options. But many people are not able to choose the right funds. It is here that our list comes in.
The list is a mix of everything you look for in mutual funds. There are all-weather funds such as HDFC Taxsaver and HDFC Prudence. One is an ELSS fund that has given superlative returns of over 53% in the past five years. The other is a balanced fund which has outperformed several equity funds by miles, with five-year annualised returns of over 42%. Both should be in your portfolio if you are looking for long-term wealth creation.
HDFC Equity, Franklin India Prima Plus, Canbalance II and DSPML Balanced fund are compelling buys for conservative investors. Their large-cap portfolios and quality holdings mean stable returns without too many hiccups. Two other funds—Magnum Taxgain, and Prudential ICICI Tax Plan—have an aggressive investing strategy. These are high-risk, high return propositions that have churned out impressive returns in the past.
Then there is Magnum Contra, which takes a contrarian view on undervalued stocks. It has given mouth-watering annualised returns of 63% in the past five years. If you invested Rs 10,000 in it five years ago, your investment would have grown to Rs 1.15 lakh now. Buy this fund to give your portfolio a unique flavour.
What about investors who are willing to take only a small risk? For them, our list has three monthly income plans that have not only beaten inflation but also given good returns to investors. These MIPs invest only 15-20% of their corpus in equities and the remaining in safe debt instruments. The middle-ofthe- road Prudential ICICI MIP is one of the best plans, well suited for conservative risk-averse investors.
For the ultra-safe, there are bond funds, though the returns from these plans have not been very healthy in the past year because of rising interest rates. When interest rates rise, the value of long-term bonds held by these funds goes down, which brings down their net asset value. The Kotak Flexi Debt fund has given a return of 7.16% in the past one year, less than what a bank fixed deposit offers today.
Investing is a rewarding but difficult habit. How can you save when there is so much to spend on—new gizmos, trendy clothes, great restaurants, shopping malls, holiday offers…. The profusion of plastic money has only facilitated the spending habit, giving a quiet burial to many a financial resolution.
Hope emerged two years ago when the Budget of 2005 removed the sub-limits on tax saving investments. Investors were freed from the dictates of the government on how much to invest in which investment option. This change in the rules brought tax planning funds into the limelight.
For people who find it difficult to save, here was an opportunity to make a fortune through tax savings. If a person invests the entire Rs 1 lakh under Section 80C in ELSS funds, his name might figure in the list of crorepatis 20-25 years from now. “Investors should look beyond the three-year lock-in period and the Rs 1 lakh 80C limit in ELSS schemes. Invest in these funds with a 5-10 year horizon,” advises Mumbai-based financial planner and director of Transcend Consulting, Kartik Jhaveri.
There is one caveat, though. The MONEY TODAY-Value Research list of best funds is not a ranking. Investors can pick any fund depending on their expectation of returns and the level of risk they are willing to take. But long-term investors need to keep one thing in mind: equities yield higher returns than any other investment avenue if held for the long term. You can never go wrong if you have invested in a good diversified equity fund. If you are unnerved by the daily gyrations of the stock markets, invest through SIPs.
Long-term investing will require regular reviewing of your portfolio. Our quarterly listing will deliver you exactly that.
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