MF Query Board

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.
 

I have been investing in SIP since the last five years regularly for covering my retirement expenses. In March 2020 the market crashed due to the corona virus pandemic and my portfolio went down by more than 50 per cent. And till date it is down even though the markets are up. So, how can I get out of this situation?

-Mukund Rajwade




Currently you have ongoing SIPs in 15 funds. Of these 15 funds, 44 per cent of the assets based on current valuation are in HDFC mutual funds. This shows that you have invested a major percentage of your money in a single asset management company (AMC), which is not advisable. This is because every AMC has its own investment philosophy. Therefore, there are chances that you would have invested in the same set of stocks, thus leading to a concentration of your portfolio in a few stocks, thereby increasing the risk of dependency. Hence, it is always prudent to diversify your investment in different AMCs.

Secondly, you have invested in almost 15 funds, which is quite high. You do not need more than 8-10 funds. Further, all these 15 funds are equity funds and aggressive hybrid funds. With your goal of funding your retirement expenses, this is quite a risky proposition. In fact, as a retiree assuming no high cash inflows each month, you should consider investing in debt funds and avoid dividend options. Being a retiree, you should have a retirement plan in place which will help you to understand how your cash would flow during your retirement period.

To give you a ballpark understanding, invest almost 5-10 years of your retirement expenses in short duration funds, liquid funds and ultra-short duration funds. Call this as your Bucket No. 1. This bucket will ensure that your near-term to medium-term cash flow need is safe from undue volatility of the equity market that you experience now. From this Bucket No. 1 you should start a systematic withdrawal plan (SWP) rather than opting for dividend options. The rest of the capital can be invested in a good mix of equity and debt funds, which would be called as Bucket No. 2.

Even in equity funds you can dedicate more towards large-cap index funds like funds tracking Nifty 50 and the rest into large and mid-cap funds. On the debt side you can invest in a short duration fund, corporate debt fund and dynamic bond fund. Further, as you move ahead in your life, make sure that you are shifting funds from Bucket No. 2 to Bucket No. 1. The reason we are not in favour of dividend options is that they are quite an inefficient way of getting a regular income. The reason for the same is that the dividend paid by the mutual fund is from your own capital and not from the dividend earned by them from any company.

Secondly, you also need to bear the Dividend Distribution Tax (DDT). Also, it is at the discretion of the fund house whether or not to pay the dividend, which may impact your cash flow and you are not in control of your cash flows. Hence, SWP would be a better option than dividend payout option. Lastly, it seems like you are a clear victim of misleading selling indulged in by some financial intermediaries. Therefore, we would advise you to undertake due diligence on the investments suggested by the adviser before investing.

 

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