I have availed of a Voluntary Retirement Scheme from my employer and invested in fixed deposits, RBI bonds , POMIS, and shares. The amount invested in these avenues is Rs 5 lakh.

I have Rs 8 lakh to invest in equity mutual funds. I can remain invested in these for 3 to 5 years. Which funds would you suggest?

I have read that returns from equity funds are in the 15-20 per cent range, on an average. If I invest at an NAV of Rs 15, is the mentioned return on the NAV or on the par value of Rs 10?

Can I invest Rs 1 lakh in ELSS-mutual funds even though I will only get a tax benefit on Rs 10,000?

Uma Murthy

Mumbai

We assume that you have sources of income (outside of the funds set aside for your equity investment) that are adequate to meet your monthly living expenses and basic medical needs.

Returns from your equity investments will vary sharply from year to year and may be negative in a few years. So you cannot depend on equity funds to shares to meet your basic requirements year after year.

The returns that are usually mentioned for an equity fund are computed on its Net Asset Value (NAV) between two dates, after factoring in dividends paid out by the fund.

Any returns that you earn from the fund would depend your entry NAV. If you purchased units when the NAV was at Rs 15, you would earn a return of 33 per cent, if the NAV rises to Rs 20.

But do note that you cannot expect any fixed return from an equity fund, however impressive its track record.

The returns of 15-20 per cent that are usually mentioned for equity funds are only indicative numbers, that represent the average yearly returns over a long time frame of say, 5 or 10 years.

These returns may accrue in compressed time periods spread across years and not in a steady manner, which is the case in a fixed deposit.

For instance, a typical equity fund that started out with an NAV of Rs 10 in end 1998, would have appreciated to Rs 22 in 1999, dropped to Rs 14 in 2001 and climbed back to Rs 33 by end of 2004.

If you invested in1999 and withdrew your money in2001, you would have lost part of your capital invested in the fund. Yet between the two points in end 1998 and end 2004, the fund earned an annual return of 55 per cent.

Clearly, the chances of earning a reasonable return on your investment are higher if you enter an equity fund in depressed stock market conditions.

When you invest in the midst of a bull market, you may have to hold on for a longer period to earn an annual return of 15-20 per cent on your investment. We suggest: