Don't be a foolish investor

Sundaram Select Midcap – Rs 15,000
2 SBI Magnum Funds – Rs 15,000
Reliance Diversified Power – Rs 15,000
Tata Infrastructure – Rs 15,000
Reliance Equity Fund - Growth – Rs 40,000 (in a new fund offering)

Now I plan to invest in:
Magnum Global Fund
Kotak Opportunities
Sundaram Select Focus

I am a high risk-high return investor whose time frame is one year.

What is your take on my portfolio?

- Amol 

You have invested in some of the spiciest and highly volatile funds available. And, with the stock markets taking an unprecedented hit, we hope you have realised this by now.

Please understand, just taking a huge amount of risk by investing in mid-cap and such narrowly focused funds does not mean you will earn great returns. Sure, you can invest in them but they should not constitute the entire portfolio.

Long-term performance, track record and a quality portfolio led by large-cap stocks should be the basis of any portfolio. Mid-cap funds and sector funds should be used in a controlled fashion to earn some extra returns. In your case, the core is missing.

Now, how must you correct this? Not by selling your existing funds. Let them remain in your portfolio. But keep a close track of their performance. If any of them start to misbehave, throw them out.

To make amends, you should concentrate on your future investments. Channelise all your future investments into large-cap oriented funds like HDFC Equity, Reliance Vision and Franklin India Prima Plus. Read 5 great mutual funds.

And if possible, avoid new funds. We can see that 40% of your portfolio is allocated to a fund that's still to prove its worth. Read How have new mutual funds fared?

Coming back to your high-risk, high-return plans for a year. We suggest you buy a return ticket to Las Vegas and gamble. Because that's where you may earn huge returns in the shortest possible time. If you want to make money with equity funds, have patience, be ready to wait for at least five years, choose established funds and invest regularly. Let inertia take over you and suddenly you will realise what a wonderful thing inertia is for equity investors.

• Made the wrong investment?

I began investing in a mutual fund – DSPML Top 100 - last May.

I put in as much as I can at any given point. So in a month, I may invest around Rs 1,000 or Rs 2,000. Since it has been a year, I'm planning to withdraw around Rs 15,000 from the fund.

Will I be taxed for it?

Will this affect my further investment in the same mutual fund?

I get Rs 10,000 every month in hand and spend just half of it. I would like to invest the balance Rs 5,000 in a mutual fund via a Systematic Investment Plan. And as and when I need the money, withdraw around Rs 1,000 or Rs 2,000 at the end of the month. Is this possible?

- Abhiram S

As regards the taxation of your withdrawals, investments in equity-oriented funds held for more than an year are tax free. Since DSPML Top 100 is an equity fund, the same will apply to that as well.

But please bear in mind that in case of SIP investments, every single installment should have completed one year. So, if you put in an amount on May 2, 2006, you will be able to withdraw it after May 2, 2007. And the June 2, 2006, investment, after June 2, 2007. Only then will you get the tax exemption.

In your case, whatever amount was invested at least one year back would be exempt from tax, while the capital gains on the rest will be taxed at the rate of 10% plus cess and surcharge.

Withdrawals will not impact your future investments in the same fund. When you begin to withdraw, the fund will automatically start with the oldest units. In technical terms, this refers to the units being redeemed on a First In First Out basis. This means the oldest investment will be deemed to be redeemed (sold) first.

If you want to withdraw the money to consume it, go ahead. Just sell your units.

But continuously selling older units while at the same time continuing to buy more units in the very same fund is not a wise thing to do. In the process you will have to pay loads and taxes. Also, with the markets being turbulent, you could incur huge losses.

The crux of an equity fund is to build wealth over a long-term. So you may lose out if you don't stick on.

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