Investment time frames of over five years can be considered as long-term

The definitions of ‘long-term’ and ‘short-term’ differ from person to person


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Which funds are better in the short-term—equity or debt? Can you suggest some funds for gains within two years?

—R.K. Sahni

The definitions of ‘long-term’ and ‘short-term’ differ from person to person and hence I’m glad you clearly mentioned what you meant by saying ‘short-term’. You are right, 2 years should be considered a short-term duration for mutual fund investment purposes.

Only investment time frames that are longer than 5 years can begin to be considered as long-term in a meaningful way. And to answer your question, for a 2-year time frame, you should only invest in debt funds.

Even funds that are hybrid in nature (with both equity and debt mixed in) would be risky for such a short time frame. Within debt funds too, you should choose less risky debt funds such as those in the short-term category (funds that invest in a portfolio of debt instruments with an average of 3-year duration).

You can invest in funds from liquid, ultra-short term, and short-term funds for your portfolio. Funds such as UTI Short Term Income fund and Tata Short Term Bond Fund will fit the bill well for you.

I am 33 years old and want to start building a retirement corpus. Which mutual funds should I invest in for this and what should my investment plan be with these?

—Prachi Sharma

As a young person with 20-25 years to go for retirement, you should invest aggressively in equity funds to build your investment corpus. The important thing to remember, though, would be to not let short-term market movements cause you to disrupt the process in between.

Markets will keep moving up and down, but if you step back and watch the growth of your portfolio, you will see over time that the long-term arc keeps bending upwards, in sync with the growing Indian economy.

Your plan should be to start investing in a handful of equity funds across market segments in a systematic manner (a sum of money every month spread over 4-5 funds) and keep this investment habit going and growing (by increasing the monthly amount by a little every year).

For example, if you are starting with a Rs10,000 per month systematic investment plan (SIP), you can invest Rs4,000 in Franklin India Bluechip fund (a large-cap fund), Rs3,000 in Mirae Asset India Opportunities fund (a diversified fund), and Rs1,500 each in ICICI Pru Value Discovery fund and HDFC Mid-cap opportunities fund (mid-cap funds). You can keep these proportions same and increase your overall SIP amount by, say, Rs2,000 every year.

If you do this and keep up with such a moderate increase annually, you will end up with a neat retirement corpus in excess of Rs2 crore in 20 years (assuming a long-term return of 12% per year compounded).

I want to know whether I can get tax benefit for investing in any equity mutual fund other than equity-linked savings scheme (ELSS)?

—Rashi Ahirwar

Tax deduction benefits for mutual fund investments are in two categories – one is the ELSS funds category as you mention. Apart from this, there is also the Rajiv Gandhi Equity Savings Scheme (RGESS) category, where investments in certain exchange-traded funds (ETFs) qualify for tax deductions up to Rs50,000.

However, an investor would need to be a first-time equity market investor (using a demat account), and would need to have an annual salary less than Rs12 lakh to qualify for this benefit. Apart from these two categories, investments in general equity mutual funds (non-ELSS) do not qualify for tax deductions.

How frequently should I review my mutual fund portfolio?

—Abhishek Dasgupta

Mutual fund investments are long-term propositions that are not suited for frequent, short-term reviews. A good thumb rule is to review one’s portfolio once a year. During such reviews, one should look to see how the funds in the portfolio are performing with respect to their benchmark indices.

If a fund is underperforming its index in terms of its 3- or 5-year performances (for equity funds; for debt funds it would be 1- or 3-year performances), then you should consider replacing it with a fund within the same category (to maintain the asset allocation in the portfolio).

One should not be swayed by any deviation in terms of its recent 1-year performance alone if the longer term track record of the fund is still positive. Another aspect to look for would be to see if there are any fund management changes in the portfolio, especially if one’s reason for investing in the fund is to rely on the fund manager’s expertise.

If the fundamental attributes of a fund remained the same during the year, and if its performance has either been positive or negative only in the recent short-term, one should leave the portfolio alone and let any systematic investment plan investments continue.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

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