Question: I need Rs. 60,000/- exactly after 3 years. So I would like to invest Rs. 1,700/- (Rs. 60,000/36 months = Rs. 1,667/- pm rounded off to next hundred). My assumption is that, even if my monthly investment of Rs. 1700/- did not even grow at all for the next 3 years, still I will be having Rs. 60,000/- intact.
So I also would like to have equity exposure to my investments. Hence, I would like to invest either in HDFC Prudence Fund or HDFC Balance Fund?
Mr. Gerard Colaco: As investment advisers, we must focus primarily on the need of the client. Choosing mutual fund avenues comes only thereafter. The most important thing I see from the briefing is that the client requires Rs 60,000/- after 3 years, and is prepared to make a monthly commitment to achieve that objective.
I would advise registering two SIPs of Rs 1,000/- each for 24 months into the following two funds:
1. Templeton India Short Term Income Plan, Growth Plan
2. FT India Dynamic PE Ratio Fund of Funds, Growth Plan
Review the investment values at the end of 24 months. If the values are above say Rs 54,000/-, the SIPs may be stopped and the existing investments may be allowed to continue until the end of the third year, after which both funds can be cashed. The chance of capital depreciation after 24 months of systematic investment in such a strategy is remote.
The client may want anything, but the client is not the expert here. We are the experts. Our advice should not pander to the fancies of the client. Our advice should zero in on the best choice to meet the client’s investment objective, not the client’s fancy.
This is very important. Understand that where investment advising is concerned, we set the agenda, not the client.
Question: As the short terms interest rates are nearly peaked out and inflation being easing can we park the money invested in Floating rate fund to Bond fund (Ex; Birla Sun Life Dynamic Bond Fund)?
Mr. Gerard Colaco: The client may be right. Interest rates do not remain permanently high. In fact, but for inflation, the Government of India would like a low to moderate interest rate regime, because this spurs economic growth. I do not know for how long interest rates will remain high in India. When they start declining, intermediate to long-term bond funds will undoubtedly do well.
However, in such a situation, the stock market will also generally do well and so it would be difficult to say where he would get the better returns. Where bond funds are concerned, I generally do not advise long-term bond funds or long-term G-Sect funds but today we have an extraordinary situation. Inflation is continuing to rise despite many interest rate hikes. We could see one or two further interest rate hikes.
My advice on this issue would be that if there is one more hike of 25 basis points or more, your client can go in for one diversified long-term debt fund, one diversified long-term government securities fund and also an investment in the Templeton India Short – Term Income Plan (TISTIP), which will serve to moderate risk. Amounts may be split equally between the three.
Understand that this is not my advice on investment. This is my advice to a client who is determined to invest only in bond funds, in view of the present high-interest situation. If the time horizon is three years, an MIP can be chosen instead of the diversified debt fund. Or even the FT India Dynamic PE Ratio Fund of Funds – Growth (FTDPEF).
The client should be clearly told that such investments have a minimum time horizon of 2 years, and they are not risk-free in the short term, even though the risk is of course far lower than an equity portfolio.
Mr. Harish Rao: I am no fan of long duration income funds either. A few drawbacks (none severe):
- High Expense Ratios. Anything above 1% in a Fixed Income fund is criminal (in my opinion).
- Fund Manager Risk. Many fund managers are rookies, not having seen a cycle like this. What if their call is wrong?
- Exit issue: We may enter after the next big hike, convinced that it would be the last. When do we exit?
Having said that, I did get around 18% CAGR in Templeton G-Sec Fund during the period 2000-2003. But in hindsight, I would view it as a risky market timing strategy. Not recommended.
However, if advisor and his client are in the same page, timing entry and exit from long duration bond funds can give tax efficient returns.