Mutual Funds
Best & Worst Mutual Fund Schemes

The best# three and the worst three schemes over the past three years, in different...

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Child’s Education
Ihave two kids aged 13 and 11. I have recently accumulated Rs1.5 lakh in savings which I want to invest in mutual funds for my children’s education. If I did not have a lump-sum, I would have taken SIP (systematic investment plan) route; but the problem is that I have lump-sum.  
 
MLF’s Reply: Investing a lump-sum in equity could be risky. A better way to invest is to first select a top-performing equity mutual fund scheme. You can invest the lump-sum in a liquid scheme of the same fund house and, then, systematically transfer an amount into the equity scheme every month. This reduces the risk of investing a large amount in a single investment at the wrong time and at a high price; your investment in a liquid scheme will earn a higher return than your savings account.
 
I  wish to invest in an equity mutual fund with a prospect of long-term benefit, at least 10 years through SIP, for my children’s (aged 8 & 3) future education. After 10 years, I need a sum of Rs1 crore. Please suggest the appropriate mutual fund products for my goals.
 
MLF’s Reply:  Investing through a systematic plan would be an ideal way to save regularly towards your goal. Considering an average growth rate of 12% for equities, you would need to save at least Rs43,500 per month for the next 10 years to reach your goal of Rs1 crore. For more on SIP investing, please read: “SIP Smartly”. This Cover Story details the periods when SIP works and when it doesn’t.
 
We suggest that one should invest in large-cap and multi-cap equity schemes as these have a lower risk compared to mid- and small-cap-oriented schemes. One needs to look for consistent performance, low expense ratio, portfolio composition, etc.

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Retirement Planning
Which type of mutual fund scheme is better—diversified equity or balanced—to achieve my financial goals? I am 30 years old and need to plan for my retirement at 60.
 
MLF’s Reply:  Balanced schemes invest more like equity diversified schemes and have almost the same amount of risk. We have written several articles in Moneylife about these schemes. (One of these is: http://www.moneylife.in/article/26039.html) In balanced schemes, the exposure to equities is reduced from 80% to 65%, or even to 60% in some schemes. Choosing a balanced scheme may not help in diversifying your mutual fund portfolio as all such schemes invest at least 65%-70% in equity, on an average. Given the returns of balanced schemes over the one-year and five-year rolling periods, reducing the asset allocation in equity may appear more appropriate for you compared to an equity diversified scheme.
 
While these schemes may be appealing because one may feel that these schemes are professionally managed, balanced funds would not be an ideal investment route for the long term. Hence, it would be beneficial to invest in top-performing equity diversified schemes.
 
While picking mutual funds for the long term, we suggest that you pick an equity diversified mutual fund scheme which has a consistent track record. Equity mutual fund schemes can generate great long-term tax-free returns, provided you invest in the right schemes. Since you have about 30 years to retirement, it would be advisable to invest 75%-80% in equities and the rest in fixed-income products.

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