An avenue to park short-term funds

By Morningstar |  10-04-19 | 
 
Morningstar recommends that readers consult their financial advisers. Below are just broad guidelines.

I have Rs 30,000 to invest. The money is from a security deposit which I will be required to return after 2 years. Can you suggest a debt fund?

- Ajay

Given the short time horizon and the goal concerned, you can look at a 100% fixed income allocation with investment in short-term accrual funds maintaining a high credit quality portfolio such as Banking PSU Funds, ST Income funds and Corporate Bond Funds. Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

Does indexation apply if I redeem liquid funds within 3 years?

- Ganesh

No. Indexation applies to debt mutual funds only if your holding period is more than 3 years.

I plan to buy a home in Mumbai over the next 5-6 years. The cost of the home will be around 3 crores. Half the amount I shall fund and take a loan for the other half. My wife and I plan to save Rs 1 lakh every month for the next 60 months. Where must I invest?

- Aarav

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

Considering a horizon of 5 years and assuming a conservative risk profile, you may have an allocation of 30% to Equity and 70% to Fixed Income. You can invest about 25% into Large Caps and 5% in mid-caps for your equity exposure. The fixed income allocation of 70% can be across accrual fixed income categories such as Banking PSU Funds, ST Income funds and Corporate Bond Funds. As your goal approaches (last 2 years), the allocation should shift around 10% each year out of equity into fixed income. Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

Investing Rs 1,00,000 per month as per asset allocation indicated above, you may be able to reach only Rs 73 lakhs at the end of 5 years. If you can increase your SIP amount by 15% annually, you may reach Rs 97 lakhs. The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.

I am 55 years old. I hold investments in mutual funds since 10+ years or so. I would like to do an SIP in international funds, either through feeder funds, Fund-of-Funds or direct. What is the best method to choose from and for how long?

- Vikas

From a fundamental diversification perspective, which is one of Morningstar’s investment principles, we strongly believe in allocation to international equities as it provides hedge against rupee depreciation and an opportunity to take exposure to varied international economic & fundamental growth drivers vis-à-vis Indian equities and fixed income.

International funds invest in various asset classes (equity/ fixed-income/ commodities) and may be diversified geographically. Investments should be made in those international markets where one has a high conviction of the growth prospects and with a 5 to 7-year horizon in view. For direct funds v/s fund -of-funds (FoF), you can evaluate the net expense ratio as FoFs have double layer of expenses – one at the FoF level and another at the underlying fund level. Feeder funds are funds which in turn invest in the ‘master fund’ and are hence a fund-of-fund strategy.

Take a look at the Global category.

I want to invest Rs 1,00,000 for one year only. I dont want any risk of capital.

- Nitin

Given the short time horizon and very conservative risk profile, you can look at a 100% fixed income allocation with investment in short term accrual funds maintaining a high credit quality portfolio such as Banking PSU Funds, Liquid funds and Ultra Short-term funds. Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

As NRI if I want to invest 3 to 5 Lakhs for 3 to 5 years in MF which is best and provide best options. 

- Ramani

NRIs can invest in Indian mutual fund schemes subject to provisions applicable in the Foreign Exchange Management Act (FEMA). Most fund houses in India don’t allow NRIs from US and Canada because of the various compliance requirements under Foreign Account Tax Compliance Act (FATCA).

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

Considering a horizon of 5 years and assuming a moderate risk profile, you may have an allocation of 30% to Equity and 70% to Fixed Income. As your goal approaches (last 2 years), the allocation should shift around 10% each year out of equity into fixed income. To attain your goal, of the equity exposure you can look to allocate about 25% to Large Caps and 5% to Midcaps. The fixed income allocation can be into short term accrual funds maintaining a high credit quality portfolio such as Banking PSU Funds, ST Income funds and Corporate Bond Funds.

Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

I am retired. 65 years old. Dependent wife of 55 years. No other dependents or loans. A fixed deposit of Rs 40 lakhs and PPF of Rs 20 lakhs. I want to invest Rs 30 lakhs in mutual funds.

- KSM

For portfolio construction, asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

If the Rs 30 lakhs to be invested requires liquidating your fixed deposit, be mindful of any penalty charges and tax implications, if applicable. As no time horizon has been indicated and no information on any source of income; considering your age you can look to allocate the 30 lakh corpus entirely into short term accrual funds maintaining a high credit quality portfolio such as Banking PSU Funds, ST Income funds and Corporate Bond Funds. Given the prevailing market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

Post your query by accessing the Ask Morningstar tab. Our team will endeavor to answer queries ONLY related to portfolio planning from our registered readers.

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