MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

Not many fund houses have opted to launch a contra fund. Does it in anyway mean that the concept of contra fund is dead?
- Rajat Bhattacharya

Growth style has always favoured in the Indian equity markets whereas value and contra have been out of favour. Also, some of the funds falling in this category have not yielded impressive returns. Even some of the good contra funds have witnessed a sinewy period. That said, many contra funds are in a deep siesta. Even their performance has been very disappointing, especially because they have been inconsistent. However, they were quite sizeable at one time. Moreover, these funds call for a lot of patience. In fact, they may stretch your patience quite far due to their relative underperformance. The underlying concept of a contra fund is that it buys stocks that are out of favour, which it thinks may have the potential for turnaround. The whole portfolio is built on such lines.

And when such stocks turn favourable and begin to gain traction, contra funds start doing considerably well. Therefore, if you already have quite a bit of diversification and are seeking to further spread your portfolio then you can surely consider investing in a good contra fund. Doing so will indeed help you to play out the cyclicality of the market as different market segments perform exceptionally well at different points in time. Further, it is prudent to have a well-diversified portfolio with different kinds of funds. Contra and value funds are something that will even aid you in taking tactical calls. Hence, these funds are down right now but not out.

Should I opt for the dividend option in mutual funds to get regular income?
- Rakesh Poonawala

First of all, it is important to understand that dividends from mutual funds are not a great gauge of any fund’s performance. This is because mutual funds that are disbursing dividends do not necessarily mean that they are performing well and dividend distribution is not out of the profit they may have earned. Let us say, for example, that you are happy if you invest in a mutual fund that gives you a dividend of 10 per cent on face value. What you need to keep in mind though is that it is your own money that is coming back to you, unlike stocks where the dividend is something over and above your invested capital. Also, the amount of dividend to disburse and when to pay is decided by the fund.

Not just that, but whether to pay the dividend or not is at the discretion of the fund. It is not mandatory on the part of the fund to pay the divided. However, dividend plans are very inefficient and won’t be able to serve your requirements of a regular income. If your ultimate goal is to obtain a regular income, then a systematic withdrawal plan (SWP) is the right option to do so. It is able to serve your requirements in a tax-efficient manner. In this you only need to decide how much amount you need and at what frequency i.e. monthly, quarterly, annually, etc. For instance, if you need Rs 15,000 every quarter, then you can start an SWP for the same. Further, before doing so, if you are retired then it is quite prudent to have a proper retirement plan in place.

Currently I am 65 years old and wish to invest in a combination of debt and equity as the bank interest rate is running down. I presently have Rs 50 lakhs to invest. How should I go about it?

- Nandan Gopalan

Being a retired individual, you need to decide whether Rs 50 lakhs that you are going to invest should provide you some regular income or not. If you have any such requirement then you should have a bucket strategy in place where you create different buckets and invest accordingly so that you get income even as your fund continues to grow. Here we assume that you have no such requirement of a regular income. If you wish to protect the worth of your wealth, then it is wise to invest this money in good aggressive hybrid funds. Aggressive hybrid funds typically invest one-third of the assets in fixed income securities and the remaining moves in equity and related instruments.

These funds are steady enough to not tumble as deep when the markets move southwards. Also, when the market turns around, they are able to have decent participation. Further, while investing Rs 50 lakhs, do not invest it in one shot. Doing so may lead you to catch the market at a high and may erode your principal in case the market falls after that. Hence, in order to avoid it, you should spread your investments over the coming two to three years by investing every month in a disciplined way via systematic transfer plan (STP).