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Financial planning with mutual funds

July 02, 2009 14:44 IST
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Which is the best mutual fund to invest now? Should you invest in equities directly or route your investment through mutual funds? Will equities give better returns than investment in real estate?

What are the pros and cons of the new pension scheme? Why ULIPs are not the best investment instruments?

In a chat with Get Ahead readers on July 1, financial planning specialist Vetapalem Sridhar answered these and several other queries related to mutual fund investments, financial planning and how to achieve financial freedom for you and your family.

For those of you who missed the chat, here is the unedited transcript.


mohan asked, tell me about the LIC MARKET PLUS-1. is it good for investments & pensions.

Vetapalem Sridhar answers,  at 2009-07-01 13:58:59Dear Mohan, this is a ULIP plan which has higher upfront costs. Plz understand in detail the costs associated before u take a decision. U can select between different options of debt and equity under this product. However a better option would be to build wealth thro Mutual Fund investing and take up a suitable term cover. This wealth built in turn can help u create ur own pension system at a later date.


Uday asked, Good Afternoon Sridhar, I am Uday Age 32 I have insurance policies of LIC for 5 Lakhs and 2 Lakhs policy for my daughter Ojaswi. Please guide me other investment options.
Vetapalem Sridhar answers, Dear Uday, it is recommended to immediately get urself an adequate TERM Insurance cover. U should NEVER buy a INSURANCE POLICY for ur child. Invest in ur name thro Mutual Funds by keeping ur child as second holder with the spouse as gaurdian. Plz read thro the following link to understand better. http://specials.rediff.com/getahead/2007/aug/07sli1.htm Investing for children A Slide Show, click NEXT to read thro.


mubsy asked, Hi ,i have cleared my home loan by 50% and now am planning to take another one.Is it a right time to plan now? or clear the existing one first and then plan.
Vetapalem Sridhar answers, The most optimal answer to this Q can be given only after understanding ur financial state in detail. As a thumb rule in most cases it is wiser to let the housing loan continue and pay it as per schedule. If ur incomes r strong and predictable, it does make sense to keep both loans running simultaneously. The money which u were going to use to clear this loan should be kept aside. Say 10 mths worth EMI should be put into a safe place like a FD. The rest should be invested into equities with a 10 yrs horizon.


Vijay asked, My investments are 60 Lakh in house, 10 Lac in gold, 3 Lac in MF, 2 LAC in equity, 10 Lac is postoffice. Is it OK? Can you suggest some changes?
Vetapalem Sridhar answers, Hi Vijay, over time u need to work on creating a more suitable asset allocation which ensure that in real terms ur wealth is growing. The allocation to equity need to increase. Plz read thro this link which explains the concept of Asset Allocation. This concept is fundamental to ensure that money grows at a rate faster than inflation thereby creating wealth for u. Asset Allocation - Secret to Financial Freedom


aqwee asked, hi i am keen on investing in index funds . whats ur take ? whats hould we take etf or index fund ? though all track the same benchmark either nifty or sensex , still there is diff is nav and i am not referring to tracking error but value of nav. please advise
Vetapalem Sridhar answers, Hi, it definitely is a gud idea. U can put around 60% of ur equity allocation into Index funds. Both methods either ETFs or Regular mutual funds, r gud. There is difference in NAV as the funds have been launched at different points in time. So fund which has been launched a long time back when mkts very at a lower level would hv grown a lot and hence their NAV would be higher. Going forward assuming tracking error is nil and expenses charged r same then all index funds should give same returns irrespective of wat their current NAVs r.


tom asked, Hello Sir, I want to invest Rs 10 lakh. In which debt funds you will recommend me to invest so that I do not have to worry about switching again. Thank you.
Vetapalem Sridhar answers, Hi Tom, it maybe wiser to do a FD in a bank instead of investing it into a debt fund. U can also consider putting a PART of the money into certain company FDs like EXIM bank (9% for 5 yrs) or Jaiprakash Associates (12% for 3 yrs) which r on currently. Plz understand the risk component properly in case u plan to go for such FDs of companies. It is imp to ensure that the money is invested into sound companies.


vasan asked, Hi sir. I am currently investing in couple of Mutual Funds totalling 4k per month and hv a bank balanc of 5 lacs. I am staying in a rented house in Mumbai and i dont want to risk at this time for buying the house. My monthly income is around 35k per month. I am planning to start to small fast food center alongwith my friend and is this right time to invest in business to the tune of around 2 lacs or buy a house in Kalyan shil road for 20 lacs........please have ur opinion..thanks.
Vetapalem Sridhar answers, Hi Vasan, these r two mutually independent decision and hence one should not influence the other. U should buy a house when ur Financial State permits u to. However business decision is dependent on whether u can establish it now and be able to run it profitably. If u r confident that business will make money if u start now, then this is wat should be the priority.


Radhika asked, Hi sridhar, I wanted to know for a newly wed couple with a monthly income of 1.04L what is the ideal debt-asset ratio? Our investment goal is a house in the next 2 yrs. Also can you recommend any agressive MF that we can invest in ?
Vetapalem Sridhar answers, Hi Radhika, the ideal debt-equity ratio is dependent on ur individual family sitaution. There is no standard formula for the same. First both of u should get urself adequate TERM Insurance covers. U can look at ICICI Pru Pure Proctect, Reliance Term Plan, SBI Shield, Kotak Prefered Term Plan, etc. Once this is in place, build some funds into a FD as part of emergency fund. Other than this u should ideally hv around 4-5 mths worth of regular mthly expenses liquid. As u plan to buy a house in the short term, u need to build money into bank FD (or a safe place) which will help u in downpayment for the house. Incase u r still left with some additional savings after this u can start a SIP with MFs. First look at building large cap funds into ur portf - HDFC Growth, DSPBR Top 100, Reliance Vision, Sudnaram Select Focus, etc.


Aayush asked, Hi, My invest in these MFs hdfc top-200,hdfc Groth, hdfc equity,dspbr top-100, Reliance vision,icici infra, franklin bluechip in SIP @1500 p.m., plz. advice me which are good to continue for 3yrs.
Vetapalem Sridhar answers, Hi Aayush, u seem to invested in a decent selection of funds which make up a gud portf. Continue with them and hv a long term horizon.


baddyfriend asked, Hi Sridhar, what is your opinion - is it more wiser to invest in Mutual Funds or directly into the Equities for a long term planning of nearly 15-20 years.
Vetapalem Sridhar answers, Hi, if u r a gud investor, direct equity investing can enable u to make higher returns. Otherwise Mutual Funds would do a better job. However it is a fact that the ratio of investors who can consistently beat Mutual funds in the long run is very small. In case u wish to go into stocks directly, ensure that u invest most of ur money only into large well known companies.


Ravindra asked, Dear Sir, I have booked the Flat worth 28Lacs in hyderabad; my income is 6Lacs per annum and I am staying in Hyderabad. How much Life insurance risk cover I should go for? Which is best policy? Please let me know your thoughts in this regard.
Vetapalem Sridhar answers, Hi Ravindra, the life insurance should cover all existing liabilities and should also be able to provide adequate Financial support to all members dependant on ur income. U will hv to calc the amt of Financial support ur family will need to arrive at this figure. Go ONLY for a TERM Insurance plan with a 20 yrs cover.


ramesh asked, Halo Sridhar..i have credit card debts worth 1.65 lacs..is it worth taking personal loan to clear my debts??
Vetapalem Sridhar answers, Dear Ramesh, u can negotiate with the Credit card guys and get this same outstanding balance converted into a PL. U need to carefully evaluate ur lifestyle and make adjustments to ensure that u r not trapped into a similar state in future. PLZ cut the credit card into 2 pieces and do not use it in future. Apply for a debit card instead.


qazwsx asked, Sridhar, You are doing a good job. I am in a fix of investing in equity or real estate. Which would be better if I get a flat in powai or invest in blue chip for 20 year. ???
Vetapalem Sridhar answers, Over a 20 yrs period equities would generally outperform regular real estate investments. The return in equities over 20 yrs can be in the range of 12-15% if invested at current levels. Similarly in real estate it would be around 8-12%.


Iyer asked, I have following SIPs: 1. DSP Black Rock Tiger (Growth) - Rs 1000 2. Reliance Infra (Growth) - 1000 3. Reliance Regular Saving (Growth) - 2000 Total Rs 4000 p.m. What returns can I expect if the continue the above for next 5 years down the line.
Vetapalem Sridhar answers, Hi, u hv a slightly aggressive portf of funds, U may want to add a large cap diversified fund to this portf. Over a 5 yrs tenure a 15-20% annualised return would be a realistic expectation.


K NAGRAJ asked, If u have a lakh of Rupee and u are seeking for an Investment Option. What and where should a person Invest. A) Short term Goal- 6 months- 30% fund required B) Long Term- 3 years and above Please advice specific Investment. Regards
Vetapalem Sridhar answers, Hi, the 30K should be invested into a safe place like a Bank FD. For the rest of the money, a major portion (evaluate wat part u will not need for next 5 yrs) can be allocated into equities with a 5 yrs horizon. This can be done via equity mutual funds.


abcd asked, Hi My Loan Status is as follows 421000 PL, 358000 CL, 2365000 HL. PL is left for another 1.5 Years and CL is paid for 2 years now and it is of total 7 years. After EMIs are paying off my balance is very less. What should I do to have ample amount of cash in Hand and get rid of the loans.
Vetapalem Sridhar answers, Increase Income! It is not easy I guess. This is wat u should do. Continue with the EMIs without any change. Over the coming years u incomes will rise. Ensure that u keep ur lifestyle at the same level and do not use up too much of ur increments as they happen to raise ur lifestyle. This is a very difficult thing to do. This additional savings that u r able to do should go into a mix of safe investments and equity investments with a long term focus. This should be a clear focus that u should have at this stage. U can marginally increase ur lifestyle as ur loans get over one by one. Immediately get urself an adequate TERM Insurance cover if u already do not hv one.


ak asked, sir i have started my career 4 months back and i earn in hand upto 14000p.m. and i have credits upto 80000/- which includes all credit card dues and i save upto 2000 p.m. so can u tell me which is the best option if i have to invest 2000 every month. is it right to invest in share market
Vetapalem Sridhar answers, U r in no state to talk of thing about investing leave aside savings itself. Talk to the credit card company and get the credit card outstanding converted into a EMI system. Stop complete use of ur credit card, unless u become more responsible with money. If u r able to save some money after paying the EMI, collect it in ur bank and then do a FD of it. First clear ur debts. Then learn to save. Only after that should u consider investing. One small step at a time should be ur focus.


bala asked, Hi Sridhar, i like to invest Rs 2000 per month throu SIP, Could you tell which Mutual funds are good. Thanking you.
Vetapalem Sridhar answers, Hi Bala, a large cap fund like HDFC Growth, Reliance Vision or DSPBR Top 100 should be a gud choice to start of with.


AshuT asked, I am investing 2000 pm each in DSPBR Top100, Kotak 30 and SBNPP select focus since June 2008. I have alss aviled a home loan of 25.5L, EMI of which is 22500 pm. But the current job scenario is not bright with no increase in pay scales. Should I continue with SIPs?
Vetapalem Sridhar answers, Hi Ashu, in case u r worried about ur job and it is difficult to manage ur current finances, u can consider the following. Stop SIPs till u r confident about ur job. In the interim period, build a safe fund into a bank (FD). This fund should be able to pay 6-8 EMIs and provide for around 4-5 mths worth of expenses. This should ideally be done over time even in case things get better in future.


modisanjay asked, I want to invest 20k as sip for 15-20 years to make a corpus of approx. 1CR.. Please advise best mf scheme.. I am already having dspbr tiger / reliance vision / reliance growth / icici pru infra / icici pru fusion fund series 2 / jm basic growth / dspbr world gold.. Please sugest asap.
Vetapalem Sridhar answers, Even if the 20 yrs 20K SIP grows at 10% annualised return u will be able to accumulate 1.5Cr (however it will hv far lower purchasing power in current terms). U can continue with DSPBR TIGER, Reliance Vision and include Reliance Regular Savings fund instead of Reliance Growth. In addition u can look at adding HDFC Top 200 or Sundaram Select Focus. U may look at phasing out the other equity funds in ur portf over time.


js asked, Hi sridhar, can you please throw some light on different advantages of child plan and which is better ..
Vetapalem Sridhar answers, Hi JS, it is best to avoid invest in child specific schemes, as they generally tend to hv higher cost structure. Instead build funds thro investing in regular MFs as the money is needed after a long period. Due to this long term horizon, equities hv the potentail to deliver superior return. Plz read thro the following link: http://specials.rediff.com/getahead/2007/aug/07sli1.htm Investing for children A Slide Show, click NEXT to read thro.


Financial asked, I am leaving for Gulf next month, May I deposit amount in my ICICI bank from there. an d since my all earning will be from out side of India, do i need to pay income tax on such amount. Please advice.
Vetapalem Sridhar answers, Hi, u can freely deposit money into ur NRE a/c (u can freely repatirate money from this account back outside India). Interest rates however r lower here. U can also deposit money into ur NRO a/c. Interest rates r higher here, but money can be repatriate subject to certain limits here. There interest earned in this a/c is taxable in case ur income crosses the overall taxable limit.


Prakash asked, Sir, I curently am in my final year of engg. However I want to continue to PG after this. But there are financial problems. How should I do it? Education loans are not possible because I live in a rented house and they demand the documents of permanent house
Vetapalem Sridhar answers, Dear Prakash, for Education Loans of upto Rs.4L no gaurantee is needed. It should not be very difficult to get an education loan. The bank may need a proof of address, not original documents of ur house. Plz visit public sector banks like SBI, PNB, BOI and talk to them about ur need for a Education loan. I think current rates for Education loans are around 11-11.5%.


Aasif asked, Hi Sridhar, I have the following Mutual Funds under SIPs - a) Sundaram BNP Paribas Select Focus, b) Birla Sunlife Income Plus, c) DSP BR Equity and d) DSP BR Balanced Fund. Please advise are they good.
Vetapalem Sridhar answers, Dear Asif, the funds invested in are gud. However I hope that u r aware that Birla Income Plus is a debt based fund and not a equity fund.


kkk asked, wht is your opinion on new pension scheme........i dont think you will answer this cause no one has answered this question on rediff chat so far........
Vetapalem Sridhar answers, Hi, a careful study of the NPS suggests that it is very gud for those investors who wish to invest atleast 30k p.a. and higher. The minimum fixed costs r such that in case u wish to invest small amts p.a. as a % of ur investment it works of quite high. However in case of higher amts the cost as a percentage of ur investments is pretty low and it will be an ideal investment option (with adequate debt exposure) with a long term focus. There r certain matters related to taxation which r still to be clarified (probably we can expect some announcement in the budget). Already companies hv started operations in this field. A more clear view can be expressed once certain things related to NPS is cleared by the govt. Lack of complete clarity is the reason why people do not comment on this Q.


coolguy_1000 asked, Hi Sri, Just a small query..I m putting 5k in HDFC top200 as SIP each month starting today for 12month..How much returns i expect after 2 years
Vetapalem Sridhar answers, Hi, equity may not be a suitable asset class to invest in if u hv only a 2 yrs horizon. U need to hv a 4-5 yrs horizon if investing at current levels in mkts. Over this tenure a 15-20% return is a reasonable expectation.


Shaiju asked, I have a homeloan@10% for 15 years, 25% of the home loan is partly invested in the market and partly in cash. I get tax benefit for entire amount of interest paid on the home loan. Do you think this is better strategy to offset the Interest paid over 15 years with profits earned in the market?
Vetapalem Sridhar answers, Yes, it is definitely a better strategy to invest money with a long term focus into equities instead of prepaying a home loan.


Ankur asked, can equity mf SIPs be looked at 3 year horizon for downpayment of house , or should i increase my horizon for 5 years , i can delay my decision of taking a house but want to stay invested in equities MF than doing recurring deposits with bank
Vetapalem Sridhar answers, Dear Ankur, a 5 yrs horizon is suggested. However at the end of 3 yrs if u find that the investments contain enough money (irrespective of the return they hv generated) to enable u to do the downpayment for a property that u like, by all means go ahead and liquidate those investments then.


mukeshdhiman47 asked, I am working in BARC Mumbai having monthly salary of Rs 40000. How much loan i can expect.
Vetapalem Sridhar answers, Hi Mukesh, u would be eligible for roughly 4 times of ur net annual salary as housing loan.


DS asked, Hi Sridhar, I am working for last 14 year & all my savings are parked in Bank FD, LIC Policy, PFF account & NSC. I have not made any investment in shares / mfs. My friends are advising me that considering inflation & tax on intrest actually I am not earning anythin from my investments but loosing out money. Can you please advise what should I do for better returns on my investments. I am talking about investments in the range of 10-15 Lacs
Vetapalem Sridhar answers, Hi, there is truth in wat ur friends r telling u. As u do not know much about equity investing plz be careful about wat people tell u about those investments. I would suggest that work out wat part of savings u can invest with a 10 plus yrs horizon of investing. A major part of this investment should be invested into equity Mutual Funds with a 10 yrs horizon. U can invest some amount as lumpsum and rest can be invested over time via a SIP into the same funds. U can look at funds like HDFC Growth, Reliance Vision, Sundaram Select Focus, DSPBR Equity etc.... Also from u future regular savings in addition to contining with the existing investments tht u r already doing a part of savings over and above the ones already being invested should be routed into MFs via a SIP.


Sripal asked, Goodday Sir, Can you please suggest a tax saving mutual growth fund, 10 year period, open ended EMI. Thankyou
Vetapalem Sridhar answers, Sundaram Taxsaver and HDFC Taxsaver r gud options.


Vetapalem Sridhar says, Thats All for now friends! Hope to catch up soon with u again to answer ur queries....


Vetapalem Sridhar is a financial planning specialist based in Pune. He can be reached at vetapalems@rediffmail.com.

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