As you near a goal, shift from equity to ultra short-term funds

In case you have been doing monthly investments for long, then you may continue for another six months and then switch to ultra short-term funds


Ramesh Pathania/Mint
Ramesh Pathania/Mint

I am 30 years old and earn about Rs.1 lakh a month. I invest around Rs.25,000 in mutual funds via systematic investment plans (SIPs), of which majority are equity schemes. I also have a life insurance policy. I plan to get married in the next two years for which I would need around Rs.20 lakh. Could you suggest an investment plan?

—Kailash Sethi

There are a few basic principles of investing. These need to be followed since that would help in deciding the kind of investments you need. First, you need to determine the need for funds—whether short-term or long-term. Second, understand your level of risk tolerance, i.e., risk appetite and risk capacity. How concerned are you if you lose money in the short term, is what determines risk appetite. Typically, when you are young, you should invest more in high-risk assets. The logic being that at a young age your goals will be long term and you will have a high risk appetite. But this is generic in nature. Everyone will have their own needs and risk levels based on their circumstances.

In your case, having exposure in equity mutual funds via SIPs is the right choice. However, with a short-term need, i.e., marriage in two years, the investment strategy may require a change. First, check how old your investments are—since when have you been doing the monthly SIPs? If they are recent, then due to the small corpus size, the exposure to debt assets has to be increased. The assets that you can consider again via SIP are short-term debt funds.

You could also consider arbitrage-based equity funds. These asset classes can be used for the first six months after which you can start an SIP in ultra short-term debt funds.

At the same time, as you get closer to your goal, shift your equity assets to ultra short-term funds.

In case you have been doing monthly investments (SIPs) for long, then you may continue for another six months and then switch to ultra short-term funds. Here, too, as you come closer to your goal, equity assets are to be shifted to ultra short-term funds.

Further, you already have an insurance plan. At present, you do not have any dependants and prima facie there are no loans, so you don’t require insurance. However, as you are planning to get married shortly, you may review the plan and consider increasing the insurance cover after marriage. A term plan is recommended.

You should also have health insurance. You can buy a plan now, and include your spouse in it after marriage. Get a health insurance plan even if your employer provides you with cover.

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