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'Should I invest in mutual funds or fixed deposits?'
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August 01, 2008

The economy and markets are in a precarious state right now and chances are that if you've invetsed your money, your investments are worth considerably less than they were earlier in the year. So what should you do -- should you hold and wait for the market to bounce back or sell and book your losses?

What is the safest place to invest right now? 

Have you taken a home loan and the rising EMIs have you worried?

To answer these and various other money and invetsment related queries, financial planning expert Vetapalem Sridhar, hosted a chat with GA readers on July 30. For those of you who missed the chat, here's the unedited transcript:

Vetapalem Sridhar says, Hi Friends! Welcome to the session on investments and financial planning.

sanju123 asked, I sold out my second home and I got some handsome returns out of it. My question is where should I invest that money? Should I buy another property in upcoming cities like nashik, Kolhapur (Maharashtra) or Should I clear homeloan of my self occupied property or Should I invest in Mutual funds? I am currently working in s\w co and my age is 29yrs. Please suggest.

Vetapalem Sridhar answers, Hi Sanju, U hv sold ur property at reasonably higher value...As interest rates r expected to rise in future, we can expect there to be a correction in real estate prices in future. If u r able to pay ur EMIs comfortably, then a strategy of paying off some part of the loan and investing the rest should be best. As equity mkts currently hv corrected to some extent, u should consider investing into MFs if u hv a 5 yrs plus horizon.

jigneshpatel asked, what are the safest and secure return fund, that can give 10 to 15% secure return.

Vetapalem Sridhar answers, Dear Jignesh, getting 10% safely now is a reality. Most banks would be giving interest around 10-11% shortly on FDs. Also u can consider investing in long term Fixed Maturity Plans (Mutual Fund FMPs) where a post tax yield of close to 10% is wat u can expect. Plz find out about the quality of papers that the FMP is investing in before taking any decision. FMPs having exposure to real estate papers should be avoided. These FMPs r open for very short durations, during which u can invest. So get in touch with ur banker or a Mutual Fund advisor to know which one to invest into. For 15% annualised return invest in equities. But then u should be willing to accept a little risk (volatility) and have a 5 plus yrs horizon of investing.

vishu asked, I have invested around 10lakh in 5 different mutual funds last year, all had good record. I have lost 50% of my money now. What should I do now? please reply.

Vetapalem Sridhar answers, Hi Vishu, from the peak the Index has corrected around 35-40%. And a lot of midcap and other stocks have corrected by around 60%. So most people who invested sometime during the second half of last year are facing a scenario where their portf values are down by 50%. So it not that only u r experiencing something like this. For those of who would sell now, it would mean that they bought high and now r selling low. This is a sure shot way of losing money. I would suggest that remain invested with a 5 yrs horizon from here. U will make reasonable returns on ur invested amts. But then also be prepared for futher volatility (downside) during the coming year or so. Also during the coming mths it would definitely make sense to invest some money periodically.

Ta asked, Hi Sridhar, I am investing thru SIP in DSP TIGER,Reliance [Get Quote] RSF,Sudaram Midcap,Sundaram Cap Opp, Sundaram Focus,IDFC [Get Quote] Premr Eqty, & HSBC Eqty Rs 5,000/ each and my invesment horizon is 20 years. Do you think that its a right portfolio and can I accumulate 10 Crores in 20 years if i keep investing in the above funds? Thnx

Vetapalem Sridhar answers, Hi! i think u have reaonably gud portf in place. But would suggest that over time u may consider exiting out of Sundaram Midcap and Capex funds and reallocate this among ur existing funds. If u continue to invest around 35K pm for the next 20 yrs a more realistic trgt would be around 4-5 Crore.

Ta asked, Hi Sridhar, I am investing thru SIP in DSP TIGER,Reliance RSF,Sudaram Midcap,Sundaram Cap Opp, Sundaram Focus,IDFC Premr Eqty, & HSBC Eqty Rs 5,000/ each and my invesment horizon is 20 years. Do you think that its a right portfolio and can I accumulate 10 Crores in 20 years if i keep investing in the above funds? Thnx

Vetapalem Sridhar answers, Hi! Ur portf is reasonably gud. Would suggest that over time u should consider exiting Sundaram Midcap and Capex funds. This u should reallocate to the existing funds. Over 20 yrs if u continue to invset around 35K each mth, a realistic trgt would be around 4-5 crore.

jnp asked, Sridhar, Is index Fund a good investment option? And do they support SIP? How to choose good index Fund? thnaks jigar

Vetapalem Sridhar answers, If u r invset with the next 20 yrs horizon then Index fund does make sense, though in the shorter run (maybe next 5-10 yrs or so) regular funds maybe outperformers. In developed countries index funds r consistently outperforming most actively managed Mutual Funds. They do support SIPs. All index funds r similar as they investment replicates the Index.

ramki asked, Hi Sridhar, what is the difference between debt and liquid fund and what is tax implication on both of them in the short-term say less than a year. Which option will give me better retuns in 6-12 months post tax, right now I am in 33.99% slab.

Vetapalem Sridhar answers, In short term the tax treatment for both a debt fund and a liquid fund would be same. Would suggest that if u have a 6-12 mths horizon, u should consider a short term debt fund and not a income (debt) fund. Income fund returns r negatively impacted by rise in interest rates. A return of around 7-8% annualised over a 6-12 mths horizon would be realistic.

unni asked, Is timing in the market important or is time in the market important?

Vetapalem Sridhar answers, Hi Unni, time spent in the mkt is definitely more important. The reason is that this IS IN OUR CONTROL. Timing the mkts is not possible as we cannot predict the mkt with certainty. Even if u invest at a high level of the mkt, if u have a long enough horizon u will see that over time the mkts rise higher and deliver reasonable returns. The best strategy to follow is to invest regularly with discipline throughout ur working life and remain invested unless u need the money.

arunm asked, How do you cope with inflation what investment is inflation free

Vetapalem Sridhar answers, Over the long run, the only investment option which gives post tax returns higher than inflation is equities. But when higher inflation days come, there is virtually no safe investment option that will deliver returns higher than inflation in the short run. Each individual has to accept this fact. A balanced asset allocation is the best bet to ensure that u r able to grow ur wealth at a rate higher than inflation. To understand plz read thro the following link.  Asset Allocation - Secret to Financial Freedom

dr asked, Review my Portfolio DSPML Top 100 - 6000 DSPML Equity - 4000 Sundaram Select Focus - 6000 Magnum Contra - 4000 Franklin India prima plus - 4000 Reliance Growth - 2000 DWS Inv Opp - 2000 Kotak Oppo - 2000 I am looking for long term (10 + years)

Vetapalem Sridhar answers, Hi! U can consolidate ur portf as a lot of funds r pretty similar in nature. Keep one from DSP top 100 and Equity. One betn Kotak Opp and DWS Inv Opp. This would also enable u to rationalise the number of funds and bring it to a more managable level. Ur horizon of investment is gud.

minu asked, Sir, I 'm working n recently married, i wantd to knw which SIP plan i should invest in or which mutual fund wil b better for me to save for my future child.

Vetapalem Sridhar answers, Hi Minu! A Sip into 2 funds should be sufficient to create funds for ur child. A large cap fund like HDFC [Get Quote] Growth or Reliance Vision and one midcap like Sundaram SMILE or SBI [Get Quote] Midcap should be gud. Invest regularly over the next 15 yrs or so and remain invested over this entire duration into equities. Plz read thro the following link to know more about investing for ur child.  Investing for children A Slide Show, click NEXT to read thro.

pradeep asked, i am new to investment i am having one lakh surplus money where should i invest it now. should i open Demat account and buy stock or mutual funds or FD

Vetapalem Sridhar answers, Dear Pradeep, this is a common question a beginner in the field of investment asks. First and foremost, if u r new to the field spend more time and effort getting to know and learn about various investment avenues. This knowledge would be the foundation of how u manage ur money in future. If ur decisions r based on wat others tell u instead of the truth or reality, u can guess how ur financial future may turn out. A safe way to start investing is to maintain a balance. Part of money should be into safer avenues and part of it should go into equities. To get into equities a very gud method is a SIP into Mutual Funds. Continue this way for a few mths or yrs till u understand investing. Only then should u look at working out how u want to take things forward.

Nanda asked, Sir, I m investing Rs. 6000/- p.m. through SIP in MF, kindly advise me should I not invest in market any more or to invest more

Vetapalem Sridhar answers, Hi Nanda! Plz continue to invest thro ur SIPs and not worry about where the mkts r going. SIPs r a gr8 way which ensure that u invest in high mkts as well as low mkts, thereby ensuring that ur avg cost of purchase would work out lower. Over time u will see that mkts would again rise and deliver superior returns on ur investment. If u do hv more surplus funds u can invest little sums in between when mkts remain down.

Pravin asked, What are the new avenues for investment? Is interest rates of small savings expected be raised by Govt.?

Vetapalem Sridhar answers, Hi Pravin, there would definitely be a demand from people to raise rates for small savings schemes, and elections being near the possibility too appears strong for it to happen. Having said that, banks will be raising deposit rate shortly. Also there is a possibility that RBI will raise policy rates in future, which may lead to further rise in deposit rates.

Mohanan asked, Hi Sridhar, Do you think the markets have bottomed out??

Vetapalem Sridhar answers, Hi Mohanan! I do not know. Wat is evident now is that govt has indicated thro RBI that it is ready to sacrifice growth in the short run, to tame inflation. They are working on a stratgey to get inflation to acceptable one digit levels by the time of elections. So this lower growth bias would definitely reflect in company results over the coming Qtrs. Other than this we can also expect the Govt to carry on reforms in the short time that they hv. In light of these things it is difficult to say how mkts will react. Though we can expect to see lower levels from here.

vicky asked, Hi Sridhar, is it a good time for real time investment in Tier II cities, as many big names in real estate are coming up with projects in north India specially. Please answer my question this time.

Vetapalem Sridhar answers, Hi Vicky, based on macro economic factors and current interest rate scenario, we can expect there to be an across the board correcion in real estate prices over the coming few mths. How much or exactly when this correction will happen cannot be predicted. Would suggest that if u r look at real estate purely from an investment angle, then would make sense to wait for a couple of mths before u take any decision.

rahulthakkarabc asked, what are the basic things to be kept in mind before taking decision to retire?

Vetapalem Sridhar answers, Hi Rahul, this is an interesting Q. Let me put down a few points that u can evaluate. 1. Finish of all loans and liabilities before u retire. 2. Provide for all expenses and responsibilities (children's education/marriage). 3. Take stock of ur assets and invsetments. Also evaluate any income (eg. Pension) that u will recieve post retirement. This should be enough to last u ur lifetime. 4. Work out ur current cost of living and evalute ur current lifestyle. Using this as base look at the lifestyle that u wish to hv post retirement. Then estimate wat would be the cost of living if u retire today. This would further enable u to project how much money u would for ur entire life. 5. By using certain tools u can find out whether the existing assets and future income flows would be sufficient for ur to sustain for ur entire life. 6. Work out with a professional or urself if u r competent and evolve a Plan/ Strategy that would help u sustain ur funds till u and or ur dependents are alive. 7. Evaluate ur and ur dependants health. Based on this u can allocate money into a separate fund to take care of medical needs or emergencies. 8. Before u retire, think about wat u will do with all the free time post retirement. Do no retire without working on this aspect, as otherwise life become very difficult.

Apps asked, Hi Sridhar, I am planning Rs 1,000 each in HDFC Equity, HDFC Top 200, Reliance Growth, Reliance Vision, Magnum Contra, Sundaram Select Focus with SIP for the next 10 years. Kindly advise if selection is OK.

Vetapalem Sridhar answers, Hi! Pick just one among HDFC Equity or Top 200. With the other funds they work out to a gud portf. 10 yrs is a gud horizon.

manishttl asked, i want to invest 50k in mutual funds!!! should i go for NFO or existing fund!!!! ? why it is generally advised to go for existing fund?

Vetapalem Sridhar answers, Can u give me a sound reasoning why u should even consider investing in a NFO? I can give u a few sound reasons why u should not consider a NFO. They are: 1. For new funds the initial charges r higher (may go upto 6%). This higher charges r to recover the money spent on advertising, mktg expenses, investor meets and giving higher comissions to sellers to push a new fund. 2. In regular funds a MF Agent gets 2-2.25% commission. But in a NFO the commissions can go as high as 4-5%. Not to mention other incentive schemes where he gets a lumpsum payout if he meets certain sales target. Also the top performing agents are sent on foreign trips. All this cost is recovered thro charges levied to the New Fund. This is the reason that u will find agents pushing new funds only. 3. U never see extensive mktg or advertsising of existing funds - reason, they r not allowed to charge higher expenses. The existing schemes have a past track record which will enable u to find out about the fund and how it has performed. The same cannot be said about new funds. 4. U must invest into existing funds unless there is strong a compelling reason to go in for a new fund. If u r able to answer this question then probably u may consider an NFO. The question is that what additional value is added to the portfolio by selecting a NFO over the other existing funds that r performing well in the industry.

dkchopra77 asked, Hi Sridhar, Myself Dinesh I have invested thru monthly SIP of Rs. 800/- each in Reliance Diversified Power Sector Fund � Gr, Reliance Equity Advantage Fund � Gr, Reliance Equity Opportunities Fund � Gr, Reliance Growth Fund Gr. I want to invest for a long period of around 15-20 years. Kindly suggest if I need to change my current portfolio.

Vetapalem Sridhar answers, There is definitely a scope for lot of improvement in the portf. Would suggest that U should pick just 1 fund from each fund house. It enable diversification among fund managers. Also avoid sector or thematic funds unless u r an expert in it. U can look at adding HDFC Growth, Sundaram SMILE, SBI Contra, Kotak 30, Franklin Bluechip as options... asked, Sir how do you rate ICICI [Get Quote] Pru Life Insurance they are are promising 30% return is it possible, what are best alternative's in mutual funds pls suggest

Vetapalem Sridhar answers, No Life Insurance company can promise such returns. They r bound by IRDA regulations to shown simulations of how the investment will grow by assuming only 6% and 10%. Other than this they r not allowed to show. So do not be fooled by any claims made by insurance agents. Always ask for a hard copy of the working on the letter head of the company along with his/her sign, before u believe them.

Vetapalem Sridhar says, Thats all for today friends! Will catch up sometime soon.

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