Query corner: Resolving financial dilemmas

I am 33 years old and am keen to start building a retirement corpus. Which criteria do I need to consider before opting for a good retirement policy? Could you suggest plans?

     Print Edition: February 2011

INVESTING

I am 33 years old and am keen to start building a retirement corpus. Which criteria do I need to consider before opting for a good retirement policy? Could you suggest suitable plans? -Ashwini Mathur, New Delhi
Firstly, you need to assess the corpus that you will need at retirement. Keep in mind that inflation will reduce the value of your corpus by the time you retire. The calculators on our Website moneytoday.in can help you calculate how inflation will impact you and how much you will need to save per month. You can put your savings in a combination of investment avenues-mutual funds, term insurance, Ulips, bonds and gold exchange traded funds (ETFs). For mutual funds, you can invest through a systematic investment plan (SIP) in large-cap funds, such as HDFC Equity, Reliance Regular Savings Fund (RSF), DSP BlackRock Top 100, and mid-cap funds such as Sundaram Select Midcap and Birla Midcap. You can also invest in DSP BlackRock World Gold Fund.

How can a retail investor put money in funds that deal with futures, options, hedge funds and arbitrage funds, which ensure better returns in the short term? -Pawan Kumar, Surat
There aren't too many hedge funds in India. There are some portfolio management services (PMS) that invest in hedge funds, but their minimum requirement of a Rs 5 lakh portfolio may not make it viable for small investors. There are a few arbitrage mutual funds, which work more like debt funds, but they may not interest you as you want higher returns. You could invest in overseas funds as per forex guidelines, but the minimum investing amount will be higher again. Futures and options can be traded on the stock exchanges just like stocks and these can get you good returns in the short term. However, do not be tempted by 'get rich quick' ideas. Many of the avenues suggested by you could also result in huge downsides, especially for novice investors. It is better to take a disciplined and long-term approach to equities.

I am a 21-year-old student and save Rs 500 each month from my pocket money. I would like to invest this sum in a good fund or stock. Where should I begin? -Soumyaa Dutta, Assam
It's good to start investing at an early age. Even a small amount can deliver significant returns over the long term due to the effect of compounding. If you want to invest in stocks, buy blue chips or mid-caps. You can also consider the stocks picked by our experts (Top Picks for 2011, January 2011). As you are young, you should hold your investments for the long term. In case of mutual funds, the investment depends on the time frame you are considering. If you want to invest for less than two years, start an SIP in the Templeton Dynamic PE Fund. If it is for a longer period, put your money in the equity diversified funds such as the HDFC Equity Fund. If your time frame is beyond five years, you could go for a mid-cap fund such as the Sundaram Select Micap Fund.

MUTUAL FUNDS

I am 50 years old and want to invest Rs 20 lakh in mutual funds. I will be retiring in 10 years. I already own a house, some land, savings in provident fund and investments in Ulips and shares. I'd like to get maximum returns from my investment. Please suggest some good funds. -Pradeep Sharma, Indore
Considering that you are investing a lump sum, go for the Axis Triple Advantage Fund (Rs 6 lakh) and Templeton Dynamic PE Fund (Rs 4 lakh). The balance Rs 10 lakh can be put in a liquid debt fund or a floating rate fund with systematic transfer to an equity fund. For instance, you can invest Rs 4 lakh in the HDFC Floating Rate Fund with systematic transfer to the HDFC Equity Fund; Rs 3 lakh in the Reliance Floating Rate Fund with systematic transfer to the Reliance RSF Fund and Rs 3 lakh in the DSP BlackRock Floating Rate Fund with systematic transfer to the DSP BlackRock World Gold Fund.

I am 31 years old and have an investment horizon of 3-5 years. I'm an aggressive investor with a high risk appetite. Currently, my investment pattern through SIPs is Rs 2,500 in HDFC Top 200, Rs 3,000 in HDFC Equity, Rs 3,000 in DSP BlackRock Equity, Rs 3,000 in Templeton India Growth and Rs 2,500 in Reliance RSF Equity. I want to invest Rs 6,000 more per month through SIPs. Should I increase my investment in any of the above mentioned funds or opt for some other funds to diversify? -Aparupa Sarkar, New Delhi
As you have a high risk appetite, you can start an SIP of Rs 4,000 per month in a mid-cap fund such as the Sundaram Select Midcap Fund. Though midcaps have not done well in the past few months, they will catch up in the long term. Do not increase the number of funds as it will be difficult to track them. You can top up the Reliance RSF Fund to the extent of about Rs 1,500 and put the balance in the DSP BlackRock Equity Fund. Your funds will then be well diversified across fund houses as well.

I want to invest Rs 50,000 in mutual funds for one year. Which is the best fund I can consider? Three years ago, I invested Rs 20,000 in Reliance Natural Resources Fund. Could you also suggest a fund where I can start an SIP of Rs 1,000 per month? -Sri Ram, New Delhi
Avoid investing in sectoral funds. These are best used by active investors who know the markets and can move from one sector to the other based on the sectoral view. You may not find it easy to track the markets regularly, so you should invest in diversified equity mutual funds, preferably through an SIP. If you want to invest Rs 50,000 for two years or so, opt for funds such as the Axis Triple Advantage and Templeton Dynamic PE Fund. You can start the Rs 1,000 SIP in HDFC Equity Fund.

Taxspanner.com will answer queries on tax; Antony Jacob, CEO of Apollo Munich, will deal with health insurance, and Anil Rego, CEO, Right Horizons, will tackle financial planning issues. Log on to www.moneytoday.in to submit your questions.

HOME LOAN

Are the rates under the fixed interest rate option for a home loan fixed for the whole tenure or revised after a few years? Should I opt for a floating rate? -Farooq Syed, Surat
Some lenders do not offer fixed rates for the full tenure of the loan and retain the option to revise it depending on the rates in the economy and/or their internal policy. This is referred to as fixed rates with money market clause. However, a few lenders do offer a fixed rate for the entire term, so you can approach them to take a loan.

I am currently servicing a car loan and a home loan. Due to the increase in interest rates, the EMIs have gone up. Should I redeem my investments and use the money to pay off these loans? -Apurva Sakhia, Jabalpur
The decision to prepay a loan should be based on its cost and impact on your cash flow. Home loans are for the long term, so an increase in their interest rates will have a much lower impact on the cash flow compared with car loans, which usually have shorter durations. So, prepay the car loan first. Also, home loans offer tax benefits, which makes the effective interest rate lower.

You can redeem the investments that are delivering a return lower than the interest you are paying on your loans.

I approached a housing finance company for a loan and I was asked to get property insurance. Is this necessary? -Surav Khaas, Ranchi
Though it is not necessary to insure the property you are buying, it is advisable to do so. If you are unable to pay the loan due to any reason, the insurance will cover it.

Renu Karnad is the Managing Director of Housing Development Finance Corporation. She will answer queries on home loans.

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