Consider lock-in period and risk before investing

This will ensure adequate exposure to debt and equity and also ensure liquidity.
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First Published: Thu, Oct 11 2012. 06 25 PM IST
Anirban Bora/Mint
Anirban Bora/Mint
I want to generate a monthly income of Rs.20,000 from available funds of Rs.10 lakh. Please advise about the investment strategy and instrument.
—Anil Desai
You are targeting to achieve a return of 24% per annum. The actual returns are even higher, as you expect the income to be generated every month on a pro-rata basis. This is not the correct way to look at investments. In case you have been receiving this advice, it will be better for you to stay away from such misleading information.
In case you have already achieved this kind of return, the expectation of getting this year-on-year is not feasible. The risk you will end up taking to get to these numbers will put your capital at high risk.
You can consider equity as an investment asset class to maximize your returns—but during the course, you will get high as well as low returns and even negative returns at times. However, ensure that you pick up good stocks and mutual funds (MFs). Consider MFs unless you are a firm believer in stocks and have time to do adequate research.
I have recently started working and can invest Rs.5,000 per month. Should I open a Public Provident Fund (PPF) account or invest in systematic investment plans (SIPs) of MFs?
—Revathi
SIP in equity funds and PPF are two different asset classes. Picking one of them will depend on many factors.
The first question to ask is: can you invest for the long term? PPF has lock-in of 15 years, so it is not recommended that all the savings are invested in it as it offers low liquidity.
Another aspect is risk. This being your first investment, you need to ensure how comfortable you are in taking risk. Investments in equity carry risk and you should be fully aware about the same. While at your age, you should have equity exposure, you need to check your risk appetite and risk capacity. Investment in SIP is also meant for at least five years.
It may be prudent if you divide your investments in two baskets and invest in both PPF (through a SIP again) and MF SIPs. This will ensure adequate exposure to debt and equity and also ensure liquidity.
Over the years, you can increase your savings and can target to exhaust the saving limit in PPF every year, while increasing your monthly allocation to MF SIPs.
Queries and views at mintmoney@livemint.com
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First Published: Thu, Oct 11 2012. 06 25 PM IST
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