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I don’t need to invest’

Posted on July 31, 2018 by admin

Why should you invest? The answer is very simple: to create wealth. And why would you want to create wealth? Well, to fund various financial goals you may have in your life like buying an expensive TV, going for a foreign holiday, retirement, and so on.

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The trouble is that most of us have a single source of income and there are various needs that are immediate, medium term and long term. If we move from one goal to to the other with our accumulated savings, we would be left with almost nothing for our long-term goals. That is why it is important to not just keep money in the savings bank, but use it to make investments that will help you create wealth over a long period of time.

If you start your investments as early as possible, you will be in for a pleasant surprise. This is because time and compounding interest are a lethal combination that will multiply your wealth beyond your imagination over a long period of time.

Consider this example: Ram and Rahim are friends, both are 30 years. Ram invests R1,000 every month for his retirement. He manages an annual return of 12 per cent on his investments and succeeds in amassing a neat corpus of a little over R35 lakh at the end of 30 years. Rahim does nothing for 20 years. He suddenly wakes up 10 years before his retirement and starts investing R12,000 every month for the next 10 years. He also manages to pocket an annual return of 12 per cent on his investment. However, at the end of the exercise, Rahim managed to create only around R27 lakh for his retirement.

How is it possible? Ram was investing a measly R1,000 whereas Rahim was investing R12,000 every month. Well, it is possible because of the compounding interest. Some people call the eight wonder of the world because of its power to multiply money over a long period. If you invest in a disciplined manner and give you investments plenty of time, you can achieve most of your goals without much pain. For some academic interest, how much do you think Rahim will have to invest to create a corpus of R35 lakh? Well, he will have to invest around R15,000 per month for 10 years to create that kind of corpus.

If you are still not inspired enough to start your investment plan right away, here is a quick list of habits that stops you from being rich.

Waiting for the perfect plan: Spending months or years to come up with a fool-proof investment plan is not a great idea. There is no guarantee that your perfect plan indeed is going to be perfect. So, start right away.

Starting late: It is extremely difficult or almost impossible to catch up with someone who has started investing regularly much earlier. Even with a very large investment, you would find it difficult to catch up. Once again, start now.

Investing for short-term: Try to think beyond a few months or a year. You think of short-term investments only when you have short-term goals. Long-term goals need long-term investments. The basic rule: stick to debt investments for goals that are below three years. Invest in equity if your goal is five years away or longer.

Playing it safe: You can’t build a large corpus with small investments in debt schemes. If you want anything substantial over inflation, you should invest in stocks. Get rid of the fear of stocks and invest in stocks for your long-term goals.

Looking for tips: Don’t waste time looking for tips to get rich quick. Most of these tips would do exactly the opposite: rob you a chance of making money on your investments. If you got your basics right, shut out all the noise and stick to your plan. Take our word for it: you would be rich one day.

Trading is not investing: Getting in and out of investments, especially equity investments, is not a great idea. You would pay higher taxes on such frequent sale and purchases. It also would rob you a chance to make spectacular returns from your investments over a long period. Giving time to your investment is key to create wealth over a long period.

Is ELSS suitable for senior citizens?

Posted on July 31, 2018 by admin

A popular misconception is that Equity Linked Savings Schemes (ELSSs) are not suitable investment options for senior citizens and retired persons. This comes from the widespread notion that equity-backed investments in any form are unsuitable for older and/or retired people. The reality is the opposite though.

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The idea that equity is risky and suitable only for young people actually pushes many old, retired people towards financial problems. The reason for that is that everyone ignores the risk posed by the biggest threat to your financial well-being, which is inflation.

Equities may be volatile, but for investment periods of three to five years or longer, equity investments are actually low in risk and high in returns. For a long-range investment, short-term volatility is no concern. In fact, when you take inflation into account, bank FDs and similar deposits generate returns that are barely higher than the inflation rate and in effect, you lose value or barely maintain it. The purchasing power of your money reduces at about the same rate as its value increases in a fixed deposit. The thing to understand here is that, even after retirement, a part of your corpus earmarked to be used after a long-term, around five years or more, should be invested in equity to get inflation beating returns. And if you have a taxable income, there is no better alternative than an ELSS.

3 other advantages you should consider are:

The realised gains on ELSS are exempt up to Rs 1 lakh in a financial year. Gains exceeding Rs 1 lakh are taxed at 10 per cent. On FDs, the returns are added to the income and TDS is deducted yearly. The yearly deduction of TDS further reduces returns by making less money available for long-term compounding.
ELSS is more liquid because the lock-in is three years. In tax-saving FDs, the lock-in is five years.
Unlike other kinds of FDs, tax-saving FDs are completely illiquid. Not only can you not break them prematurely, you cannot take a loan against them either.

Like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. However, a smaller number of evenly spaced investments are also suitable.

The impact of Rs2 lakh cap on losses from house property

Posted on July 31, 2018 by admin

Union Budget 2017 has proposed to cap the maximum loss that can be derived from a house property and set off against other sources of income. This loss could be in the nature of interest paid on a home loan being more than the rental value from the house.

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This means that from the next financial year, a homeowner will only be able to set off such losses only up to Rs2 lakh from income under the head ‘income from house property’. However, if the loss is more than Rs2 lakh, it can be carried forward for 8 subsequent years for set off.

The move is set to hit many investors who may have invested in this asset to bring down their tax liability by setting off losses.

Owner of one house
If you own only one residential property and that is self-occupied, by you or your family, the proposed amendment does not affect your tax liability. There is already a cap on the maximum deduction against the home loan interest taken for a self-occupied house: up to Rs2 lakh, under section 24(b) of the Income-tax Act, 1961.

Till now, if you had only one property, and you chose to rent it out, then you were allowed to set off the entire loss from such property against other income sources. However, from next financial year, you would only be able to set off such losses up to a maximum of Rs2 lakh.

Owner of multiple houses
If someone owns more than one property, then any one of those properties can be considered self-occupied. The rest are considered to be let out or deemed to be let out, if they are vacant. Till now, to calculate income from house property, one had to add the annual rent (even if house was deemed to be let out) from all the properties and deduct expenses (say, standard deduction, interest on borrowed capital and municipal taxes). If there was a loss after paying all these, which is usually the case, the entire loss could be set off against income from other sources. This drastically brought down the tax liability (see table).

For instance, if one earns Rs30 lakh from salary and loss from house property is Rs5.9 lakh, then the net taxable income would be Rs24.10 lakh. However, once the proposal to cap the losses to Rs2 lakh is implemented, the taxable income would rise to Rs28 lakh. This will increase the tax liability of the person by about Rs1.2 lakh (30.9% ofRs 3.9 lakh; which the difference between the net incomes after the set-off).

Gold can’t be default option

Posted on July 31, 2018 by admin

When I was speaking to a group of women about investing, the inevitable question about gold came up. They seemed quite
hesitant to ask about the place of gold in a household’s financial planning decisions, since accumulation of the yellow metal is
not considered `modern’. But they seemed somewhat unwilling to concede that buying gold is not a sound financial decision.
Our views about gold are mired in social practices and customs that have persisted over a long time. We should question these
views.
When a girl gets married and moves into a strange home, she takes her share of the paternal property, legally recognised as
streedhan. This includes jewellery and gifts given by her parents, relatives and others on the occasion of her wedding, and she
has the right to this property at all times. The Supreme Court has held that the husband or the in-laws who may be in
possession of such property or jewellery, only hold such articles in trust and cannot claim ownership.Streedhan thus doubles as
protection for the woman in her marital home.
Over time, women have become ecoomically independent and secured their nomically independent and secured their lives
with their profession and income, but the practice of giving gold to the daughter persists, and accounts for a large portion of
gold bought in most households.
To include an asset in the financial planning basket of a household, the pertinent question to ask is: How would this asset be
used? Investment in gold must pass that test. Consider a rural household with limited access or knowledge about financial
products. A primary problem for this household is the uncertainty of income. If the crop fails, or if rains are delayed, the
household faces a cash crunch. Such households typically use gold to create a liquid asset that can be pressed into service.
When there is adequate income, gold is bought; when there is a crunch, gold is pawned to raise money . Here, gold is a source
of funding and a generator of liquidity . Gold loans were included in priority sector lending of banks, due to this prevalent
practice

Asset allocation is key to good investing

Posted on July 31, 2018 by admin

Even as there was shock and indignation at the hacking of emails of
popular public figures recently, I was astounded at the amount of idle
money that lay in the savings bank account of an aggrieved person.
Another case of a busy professional whose asset allocation is so wrong.
Asset allocation is the most important investment decision we will ever
make, and sadly, most of us do not give that decision the importance it
deserves.
We are adamant about seeking predictability with our future. We tend to
think of investing in risky assets as extremely volatile and value eroding.
We also dislike the fluctuating returns and the loss of control. We freeze
and fail to act when we hear stories of risk and think that our money is
best left idle. Unproductive but safe, we presume.
There is simply no asset that is risk-free.We could lose our jobs, and the income that we earn as human assets can stop. Or
worse, we could die and fade away . Our homes can also lose value, our banks can go bankrupt, our bonds can default, the
government can collapse and companies we chose fondly may cease to exist. But we cannot live life assuming that all these
extreme events are waiting to happen, and all at the same time. All these extreme forms of risks we know will not manifest at
the same time. That is why asset allocation works wonderfully for our wealth.
In a world where inflation is falling and rates are going down, entrepreneurs will find it worthwhile to make investments in new
businesses. If private businesses are failing from risks in their balance sheets, governments will step in to support the economy
. If commodity prices are falling from lack of demand, producers will cut back investments, which will lead to reduced supply
and an eventual turnaround in prices. In a normally functioning world that is not in the grip of a world war or multi-country crisis

3 don’ts in tax planning

Posted on July 31, 2018 by admin

Tax planning will help you pay less income tax. Something everyone wants. But smart tax planning will help you boost your portfolio. The actual tax strategy will have a different meaning and emphasis depending upon an individual’s personal circumstances.

1) Don’t view any investment in isolation.Good tax management can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.

Most investors in a crazy dash to meet their Section 80C requirement will opt for unit linked insurance plans, or ULIPs, and endowment plans and often end up with products that do not suit their need.

Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.

Approach tax saving with a holistic mindset. For instance, if your portfolio is heavily tilted towards debt, it would not be wise to opt for an investment in National Savings Certificate, or NSC. Instead, think of an equity linked savings scheme, or ELSS.

Which brings us to our next point.

2) Don’t limit tax saving to just fixed-return instruments.

Individuals tend to look at the Senior Citizen Savings Scheme, or SCSS, 5-year deposits, National Savings Certificate (NSC) and Public Provident (PPF) as the tax-saving investment avenues. But you can also invest in an equity linked savings scheme, or ELSS. These are diversified equity mutual funds that offer a tax benefit under Section 80C. They have the lowest lock-in period of just three years.

As on January 9, 2017, the ELSS category average delivered an annualised 3-year return of 18.52%. Do note, that was just the category average. The highest return was 27% while the lowest was 12%.

Having said that, keep in mind that these are equity funds which means, the return is far from guaranteed. So pick a good fund that has shown consistent performance and stick with it over the long haul. Don’t be in a tearing hurry to sell your fund units on completion of three years. Exit from the fund when the market is rallying so you walk away with a profit. If this means hanging on for a few more years, do so.

Do read: 3 don’ts when investing in ELSS.

3) Don’t ignore the big picture.

Tax saving is more than just investments and goes beyond Section 80C.

If you have made a donation to a charity that offers a tax deduction, avail of it. If you are paying premium on a medical insurance policy for yourself and dependents, be sure to claim the deduction.

Also, if you are servicing a home loan or an education loan, you are eligible for income tax deductions. Under Section 80C, you can even show the expenses of your child’s education to avail of a deduction.

When deciding how much to invest to max your deduction under Section 80C, take into account children’s tuition fees, principal repayment on home loan, contribution to employees provident fund (EPF), and any life insurance premium you are paying.

3 New Year moves to make you rich

Posted on July 31, 2018 by admin

You don’t need to get ultra-frugal to save money. The general impression is that to pump up one’s savings people have to forgo all the fun stuff. Not at all. You just have to play it smart.

1) Prioritize debt

Not all debt is bad. Not all debt is equal.

Credit card debt is a killer. It may seem harmless at a mere 2.5%, but do note that is a monthly calculation. The interest rate you pay on your credit card outstanding could vary from 30% to 42% per annum. And when you carry forward the outstanding dues, the interest rate is applicable on the carried forward amount and to fresh billings. So all new transactions will also attract an interest rate payment till the outstanding amount is repaid in full. This is a surefire way to create a debt trap.

So while you do get the convenience of repaying your balance over a period of time, this ease of payment comes at a hefty cost. You ultimately pay back more than you borrowed and you have less money to save and reach your financial goals. So if you are in credit card debt, make that a priority to clear and avoid using your card for further payments till the debt is cleared.

On the other hand, if you are servicing a home or education loan, you do get tax benefits. Not so in the case of a personal or auto loan. So get rid of credit card debt first followed by loans which give you no tax benefit.

2) Prioritize savings

Learning to save can be difficult. But the most difficult aspect of it is getting started. If you periodically save at least 10-15% of your income, it will become a habit. And over time it will accumulate substantially.

Let’s say you invest Rs 1 lakh to withdraw when you are 70. While invested, it earns a rate of 12% p.a.

If you are 30 years old when you make the investment, you will be sitting on Rs 1.18 crore by the time you are 70. Wait for just 5 years, which really does not seem long when you take decades into account, and that money will be worth just Rs 65.30 lakh when you get to 70. By delaying your investment by just a few years, you pay a heavy cost.

So start saving NOW.

But of course, it does not mean that you just leave your savings in a bank account. That will defeat the very purpose. You need to put that money to work if you want to create wealth. Equity offers great potential to convert your savings into wealth. And you can start with very small amounts too. Cut down on your spending by just Rs 1,000/month and invest that amount in an equity mutual fund. Within the next 10 years, you would be patting yourself on the back.Let’s say you invest Rs 1,000/month over 10 years in a systematic investment plan, or SIP, that returns 12% p.a. You would have invested Rs 1.20 lakh over 10 years and your corpus would be worth Rs 2.30 lakh within a decade.

Now let’s say you go one step further and increase the SIP amount every year by a very affordable Rs 500. You would have ended up investing Rs 3.90 lakh and your corpus would be worth Rs 6.36 lakh over the same time frame.

Start saving and investing NOW.

3) Prioritize tax planning

Tax planning is more than Section 80C. It is more than fixed income instruments such as the Public Provident Fund, or PPF, and the National Savings Certificate, or NSC.

Good tax management can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion. For instance, if you have no equity exposure in your portfolio, you should consider an equity linked savings scheme, or ELSS, which is an equity mutual fund that offers benefits under Section 80C. Most investors, in a crazy dash to meet their Section 80C requirement, will opt for unit linked insurance plans, or ULIPs, and endowment plans and often end up with a portfolio heavy with insurance products that do not suit their need.

3 missteps in retirement planning

Posted on July 31, 2018 by admin

Even careful, dedicated savers don’t always have a strategy in place as far as their retirement planning goes. Many times, people just put money aside and hope it will work out.

We pinpoint three common pitfalls when it comes to saving and investing for retirement. These little missteps could put a deep crack in your nest egg.

Here’s what they are and how you might avoid them.

1) Underestimating life expectancy

Seriously, no one is really good at this. Estimating how long you are going to live is one of the thorniest issues in retirement planning. A grave error is underestimating how long you are going to live, which brings with it the reality of outliving your money – a fairly ghastly thought.

Think about it. You eat right, exercise regularly and conduct your regular health check-ups because you want to live longer and live healthy. While you should be commended for it, it could also be tricky if your planning does not take into account an adequate stream of income for these added years.

Chances are you will live a fairly long life. Here’s why.

According to the Sample Registration Survey (SRS) Based Life Table 2010-14report, life expectancy has risen from 49.7 in 1970-75 to 67.9 in 2010-14, registering an increase of 18.2 years in the last four decades. (Source: Deccan Herald)

Life expectancy has more than doubled between 1947 and 2011 from 31 years to 65 years. (Source: Eureka Street)

According to the WHO’s World Statistics Report 2016: In 1990, Indians were expected to live on an average till 58 years. This rose to 66 years in 2013. In 2015, life expectancy at birth was 68.3 years. (Source: First Post)

Statistics released by India’s Union Ministry of Health and Family Welfare in 2014 showed that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. (Source: Times of India)

Before you start your calculations, take note of the term ‘average’. There is a significant life expectancy gap between the affluent and deprived communities. If you are in reasonably good health, have access to good medical facilities and healthy nutritious food, and not suffering from chronic or acute diseases, you could live well into your eighth decade, way higher than the average. Look at your family history. See how long your parents lived.

According to certain studies, by 2050, the number of Indians above the age of 65 will cross 200 million from about 80 million currently, while the number of Indians above 80 years of age will be at 43 million, second only to China.

Err on the side of caution. Plan for chances of survival for at least a decade or so post retirement.

2) Cheating on your retirement savings kitty

There are many ways you can do this.

The first is by dipping into it to meet other goals. Often individuals use their retirement savings fund to pay for their child’s education or, worse still, the child’s wedding. This is a dangerous move because it could result in you not having sufficient funds when you retire. Being old, unemployable and broke is a very scary scenario. Your children can take loans for higher education or weddings, but you will not get a loan to tide you over in old age.

Another way you are cheating is by not increasing your retirement contribution as and when you get a salary increment. You are saving for retirement so you can live a similar lifestyle to the one you have currently. If you keep your savings proportionate to the salary you had as a 25-year-old, you cannot expect to support a better lifestyle in retirement. When your income increases, so should the amount you save. The way to do this is not to get stuck on an amount, but go by a percentage. So if you are saving 15% of your income for retirement, stick to that percentage as your salary increases. The actual amount will automatically go up. Remember, when saving for retirement, it is very difficult to make up for lost time.

3) Investing too little in stocks

The current 15-year average annualized fund return from the large-cap category (19.50%), mid- and small-cap category (21.74%) and flexi-cap category (21.95%) shows that over the long run, equity does deliver higher than other asset classes. Also, over a holding period of more than 12 months with regards to equity, long-term capital gains is nil. So that is a tax-free return.

You won’t get such a return from a fixed-income instrument. And you will have to pay tax on the interest earned.

When planning for retirement, individuals tend to be ultra conservative and put their money in fixed deposits and bonds. All in an attempt to avoid the volatility of equity. What they do not realise is that they would end up dealing with shortfall risk.

Investors can fall short of their financial goals for many reasons–key among them is under saving. But if you’re saving for a long-term goal, holding too much in investments with little to no short-term volatility–but commensurately low returns—will contribute to the shortfall risk.

If you are avoiding equity on the premise that it is more volatile and hence more risky, you are not seeing the whole board, to borrow an analogy from chess. We tackled this issue in 3 habits stopping you from becoming rich. Don’t shy away from maintaining an equity exposure in your portfolio. If you choose to do so, you could be jeopardising your entire financial plan.

Do consider equity funds and invest in them systematically.

Our final word of advice: Do consider talking to a financial adviser who will be able to give objectively guide you in your savings plan.

3 habits stopping you from becoming rich

Posted on July 31, 2018 by admin

People don’t become wealthy by accident. You have to be determined to do the right things to create wealth. Since it starts with mindsets, we suggest that you nix these three common, yet costly, habits. 1) Procrastination “I can’t afford to invest right now. I’ll do it next year once the company reinstates bonuses.” Sounds familiar? Procrastination is a bad trait in itself, but can be disastrous when it comes to investing. Procrastinate on your diet if you need to (not that we are suggesting it). But don’t delay on your savings plan. The longer you wait, the more it works against you. Compounding is a mathematical computation that works with time on its side. Don’t wait for your next bonus to invest. Also, as your salary or income increases, let the allocation to investments also rise. The more you delay, the more it reduces the amount of time your money has to work for you. If you had invested Rs 2,000 per year over a decade, the value of your investments at the end of the time period would be far greater than had you started investing Rs 4,000 per year halfway through that period. Let’s say that you start saving at the age of 25 with the purpose of accumulating Rs 1 crore by 65. For ease of understanding, let’s assume the rate of return as 9%. To amass this corpus, one would need to invest Rs 2,140 on a monthly basis for the next 40 years. Delay this exercise by just 5 years. If one starts investing at the age of 30, acquiring the same corpus would require an investment of Rs 5,460 every month. Alright, that too sounds doable. Now let’s push it back further. If one starts investing by 50, s/he would have to shell out Rs 51,700 every month for the next 10 years to reach the target of Rs 1 crore. Start now. 2) Taking useless advice Cynicism isn’t a particularly positive attribute, but it has its place. Be cynical of tips when it comes to investing. In fact, it makes sense to avoid them altogether. Tips are for waiters, not investors. When investing in an equity product – be it stocks or a mutual fund, you need to make an informed decision. Besides tips, avoid hunches and speculation. Don’t risk gambling away your savings. To be a successful stock market investor, you need to think and behave like an owner. If you are buying businesses, it makes sense to act like a business owner. This means reading and analysing financial statements on a regular basis, weighing the competitive strengths of businesses, as well as having conviction and not acting impulsively. It also means you have to pay wisely for quality. The difference between a great company and a great investment is the price you pay. You decide to enter the stock market at a time of frothy valuations, you will have a very, very long wait to get a decent return on your investments. Similarly, don’t invest in a fund just because a friend or colleague or family member pointed out what a great run it had. Make the effort to understand the fund’s investing mandate and how it would fit in with your overall portfolio. 3) Avoiding equity Investors can fall short of their financial goals for many reasons–key among them is under saving. But even if you are saving sufficiently but not giving the savings a chance to grow, you could be high on shortfall risk. If you are avoiding equity on the premise that it is more volatile and hence more risky, you are not seeing the whole board, to borrow an analogy from chess. Where your long-term goals are concerned, don’t shy away from maintaining an equity exposure in your portfolio. If you choose to do so, you could be jeopardising your entire financial plan. No one is suggesting you go out and randomly invest in equity. If you do not have the expertise to buy into stocks, consider equity funds that are consistent and invest in them systematically. For instance, the 10-year annualised return of the flexi-cap category of equity mutual funds is around 11%. Do note, this is just the category average. There would be funds that have delivered much more. Or take the case of the mid- and small-cap category over the same time period – 13.18%. Not only is this much higher than what you would get in a fixed return instrument, it also has no tax implications in the sense of long-term capital gains being nil in equity mutual funds. Neither are we suggesting that your entire portfolio be tilted towards equity—there are various considerations that will go into such a decision, namely your age, the number of years you have left before you throw in the towel, various sources of income, and your risk capacity. But a too-conservative portfolio–one that emphasizes cash and fixed deposits and bonds at the expense of stocks–can actually enhance shortfall risk. Have a sensible asset allocation fine-tuned to your circumstances.

Source: https://www.morningstar.in/posts/38562/3-habits.aspx

Excess funds in bank? Pick a debt fund

Posted on July 31, 2018 by admin

The move to demonetise old Rs500 and Rs1,000 currency notes, among other things, will certainly ensure that idle cash gets into bank accounts. Now that it is in a bank account why leave it idle? Find an appropriate way to invest it and earn a return, which beats the 4% average that most bank savings accounts offer.

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Fixed deposits are an option, but don’t go for them till you have explored what is available in the debt fund universe. Debt funds are of varying types and it is not too difficult to find one that suits your risk-return requirements.

For your liquidity needs
As per the Reserve Bank of India (RBI) data, banks have over Rs100 trillion of deposits. Compared to this, debt mutual funds have only Rs10trillion in assets under management (AUM). While familiarity and assured returns may draw people to fixed deposits, they are beaten by mutual funds in terms of returns. Also, in some cases, debt mutual funds are more tax efficient.

The money you invest in fixed income schemes should be that portion of your asset allocation which you would need in the next few months to a couple of years. Therefore, you would like to keep it accessible and would not want to risk the capital. Debt funds can be a good choice in such scenarios. These are mutual fund schemes that invests money in bonds and money market securities issued by the government, banks and other corporates.

There are various types of fixed income funds. Liquid funds, which invest in fixed-income securities that mature within 60 days, are the most stable in returns as they earn from interest accumulated on underlying securities. There is the ultra short term fund category which also has a similar structure. Most of the other debt funds earn from a mix of interest on underlying securities and the capital gains. “We talk to clients about maintaining a liquidity margin for contingencies. Apart from the savings account, some of this can go into liquid funds or short-term debt funds. There are many short-term goals that can be planned, such as down payments and vacations. Funds required for these can get invested in suitable debt funds,” said Suresh Sadagopan, a Mumbai-based financial planner.

Returns from liquid funds are the most stable of all mutual funds, as they rely only on the interest accumulated from securities that are due to mature over the next 60- days. Hence, risk is low. However, returns can get negatively impacted by extraordinary events that impact systemic liquidity (like the 2008 global financial crisis). You may even lose money if you withdraw immediately after such events. But if you remain invested slightly longer, returns accumulate again once after the event risk tides over.

The biggest advantage is that you can redeem at any time. For most liquid funds, money is credited into your account within a day and asset management companies (AMCs) are bringing in innovative ways to reduce this time. Reliance Money Manager Fund and DSP BlackRock Money Manager Fund-both ultra short-term funds-allow instant redemption (subject to a limit of Rs2 lakh per day). So, money gets credited to your bank account almost immediately after you redeem.

Not just for liquidity
Short-term income funds are more useful for a 1- to 3-year kind of allocation. Historically,their returns have shown better performance than fixed deposits. Moreover, if eventually you don’t end up redeeming within the expected time period, and remain invested for over 3 years, there are tax benefits to be had.

Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors, said, “The effective long-term tax on redemption of a debt fund is lower than what you would pay on interest earned from fixed deposits. Moreover, in a falling rate environment, this difference can add up to even more in absolute terms.”

In a falling rate environment, debt funds gain from a positive change in bond prices. This gets reflected in the net asset value (NAV) of the fund, which increases, and you gain on redemption.

Deepali Sen, founder, Srujan Financial Advisers, said, “Given that funds are market linked, there is a potential to get higher returns, which is not there in a fixed deposit.” Sen prefers liquid and ultra short-term funds over short-term income funds. However, there are risks as well.

Long-term income, gilt, credit opportunities and corporate bond funds are riskier than others, and are better utilised towards tactical allocation to take advantage of short-term market opportunities. You need to know when to buy and when to exit; these are not suited for stable return allocation. To find the debt fund that suits your requirement appropriately, other than the structure of the fund, also consider the experience with the asset management company and the fund manager’s performance track record.

Additionally, debt funds have a degree of credit risk, which essentially measures the probability of default in payment by a bond. Always check the credit rating profile of securities held in debt funds before you invest. First-time investors should pick funds with a high credit rating profile. Lastly, some funds will have an exit load that you need to pay if you withdraw within a specified period. Check these details and invest.