USE MUTUAL FUNDS TO REACH YOUR GOALS
Are you planning to buy a house in 6-7 years? Or
perhaps start saving for retirement, which is 20-22 years away? Or maybe you
just want to take a vacation in two years’ time? Irrespective of the time
horizon for goals, most people invest in a rather erratic manner, putting away
as and when money is available in a random bunch of instruments. What this
often means is that they can never be sure whether they will have the requisite
amount when they need it.
It is a good idea, therefore, to have an effective
investing strategy in place.
As a first step, identify all your goals, including very
short term, short term, medium term and long term.
The second step involves calculating the future goal value
and the time frame in which the amount is needed.
As a final step, choose the appropriate investment
tool, depending on the sum required and time frame.
Mutual funds can serve as good one-stop shop for all
your investment needs because of the variety of options available, be it
equity, hybrid (which are a mix of equity and debt), or debt funds. For
instance, if you need a large corpus of, say, ₹1 crore in 15 years, it is a good idea to rely on an equity
fund, while a smaller corpus of, say, ₹10 lakh in seven years would require a debt fund. Here’s how you
can pick a fund that suits your specific goal requirements.
Goal horizon: Very short term (3
months to 1 year) Goal: Emergency corpus Mutual fund category: Liquid fund,
ultra short-term fund
Some goals like building an emergency corpus require
the amount to be readily accessible at a short notice. Liquid and ultra
short-term funds fall in the debt category and invest in high credit quality
instruments, which not only offer safety of capital but also provide higher
returns than bank savings accounts. These can be redeemed easily and are taxed
as debt funds, at 20% with indexation on long-term capital gains after three
years. Short-term gains are added to the income and taxed at applicable rates.
Goal horizon: Short term (2-3
years) Goal: Vacation, buying a car Mutual fund category: Debt fund, arbitrage
fund
For short- term goals of 2-3 years, debt or arbitrage
funds can be a good option. Since the time frame is short, debt funds offer
safety of capital by investing in a mix of debt or fixed income securities,
such as treasury bills, government securities, corporate bonds, money market
instruments and other securities of varying time horizons.
Arbitrage funds are also a good option since their
risk profile is similar to a debt fund, but for taxation purposes they are
treated like equity funds. So short-term gains for less than a year are taxed
at 15%, while long-term gains invite 10% tax for profits over ₹1 lakh. The fund manager buys
shares in the cash market and sells in futures or derivatives market, earning
from the difference in the cost price and selling price. In addition to taking
positions in the equity market, some assets are invested in the fixedincome
instruments.
Goal horizon: Medium term (4-8 years)
Goal: Buying a house, starting a business Mutual fund category: Balanced or
hybrid fund
Balanced or hybrid funds invest in both equity and
debt typically in 60:40 ratio. So depending on the horizon and one’s needs, an
investor can pick a fund that invests 60% in equity and 40% in debt, or vice
versa.
Goal horizon: Long term (more
than 8 years) Goal: Child’s education, retirement Mutual fund category: Equity
or equity-oriented fund, ELSS
For long-term goals of over 8-10 years, equity funds
or diversified equity funds that invest nearly 80% in equity, can be
considered. This is because these will give high returns of over 12% and the
risk is virtually negligible after 10 years. One can opt for a mix of large-,
mid- or small-cap funds within these as they offer high returns. ELSS is also a
type of diversified equity fund, but with benefit of tax saving. It offers
exemption under Section 80C, and has a lock-in period of three years.
by
Riju Mehta
ETW24AUG18
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