FINANCIAL GUIDANCE

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Investing for 14% return

I am a student and I want to invest Rs 500 monthly for two years and I expect return @ 14 per cent. Please suggest where I should invest my money - mutual fund’s SIP plan or fixed deposit?
                                                                                                                                              - Ajay Khandelwal, Jaipur

Ajay, let us tackle each of our choices and understand our options. First, mutual funds or fixed deposits? Given that your expected rate of return is 14 per cent p.a., I do not expect many companies or banks to offer such a high rate of interest. Banks are definitely ruled out. In the current situation, if a company were to offer such a high rate of interest, I would be very wary of the safety of the deposit. Companies with a high credit rating offer interest rates in the range of 8% to 8.5% per annum. So, I guess, fixed deposits are ruled out and mutual funds are in.

The next factor to be tackled is the rate of return. Normally, one can expect about 6% to 7% from the bond/deposit category of assets and about 15% to 18% from equity/equity funds as an asset. Your expectation lies somewhere in between – hence a mix of these two types should do the trick. Using simple arithmetic, one can deduce that a combination of  85 per cent in equity and 15 per cent in debt can yield the desired result for you.

Now, the most important factor in your case is the time you have allotted for the growth. Whereas two years is acceptable for the debt category, it is not enough to give substantial certainty in the case of equity. If the markets do well (for which there are reasonable good chances) you can reach your target. If not, your waiting time will have to increase to maybe three years or so. Are you willing to take this amount of chance? If yes, then I recommend that you invest in a recurring deposit with a bank for the 15 per cent portion of the investment. For the 85 per cent equity component, an SIP in Franklin India Prima Plus or the like should be fine.

But if you reduce your SIP below Rs 500, it may not be accepted. Breaking the amount in the ratio 85:15 will then not work. That leaves you with the option of making your SIP in a single fund which follows that asset allocation. Yes that is also possible! There is one fund, Reliance Monthly Income Plan, which follows a 85:15 allocation of assets and also accepts a Rs 500 SIP!! All the best!

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Are Guaranteed ULIPs Good?

I am a 46-year-old working with a private company in Vadodara. I am planning to invest in a guaranteed returns ULIP plan. Please tell me if it is advisable to invest in these plans  and, if yes, also suggest which is the best plan available.
                                                                                                                                               - Ketan Desai, Vadodara

Ketan, my observation is that the term ‘guarantee’ is extremely attractive to investors most of the time. But most of the time, the guarantees offered in ULIPs are a guarantee to the extent of all premiums paid or a measly 2% to 3% returns. All this, if you are in the plan for atleast 10 years! I do not consider this as an attractive guarantee. I would rather invest through SIP in a balanced fund or a conservatively run fund such as the Franklin PE Ratio Fund for 10 years and buy a term policy for the amount of cover your family requires separately. This way, you get the required protection that you are looking for at the cheapest cost with-out tying up more money in it than is required.