For short-term investments, equity schemes can be risky

Debt-term are better suited for shorter time period of less than five years


I have recently started investing in mutual funds with a one-time investment in ICICI Prudential Tax Saving Growth Plan. I want to start with a systematic investment plan (SIP) from April, and invest my bonus amount that I will get in June as a lump sum. I want to invest in such a way that my tax investments are taken care of. Which fund would be good for a Rs.3,000-4,000 monthly SIP, and which for lump sum?

—Radhika Awasthi

When it comes to whether to invest as a lump sum or through an SIP, it depends on the type of mutual fund scheme more than anything else. And in turn, the type of scheme depends on the time frame of investment, and other factors such as risk tolerance levels.

The thumb rules to follow are: one, equity funds are always better invested in a periodic, systematic fashion, while lump sum investments are better made in debt funds. Also, remember that getting a lump sum in your hand does not mean you would have to invest all of it in one go. Second, the longer the investment time frame, the better suited are equity funds as a choice. Please note that tax-saving funds are always equity funds.

Applying these thumb rules to your situation, with the assumption that you are investing for the long-term (at least 5 years, if not more), you should first take care of your tax-saving investments for the next financial year.

Since these are equity funds, you should ideally invest in them through an SIP. So, you can continue in ICICI Prudential Tax Saving Fund for your SIP.

The lump sum (bonus amount) that you are getting can be placed in a liquid fund in one go (a liquid fund is a low-risk debt fund). From this fund, you can set up a Systematic Transfer Plan (STP) into an equity fund over the period of the next 12 months. For example, you can make a lump sum investment in a liquid fund from Birla Sun Life Mutual Fund, and set up an STP of 12 equal instalments to Birla Sun Life Frontline Equity Fund.

Which funds are better in the short-term—equity or debt? Can you suggest some for gains within two years? I want to save around Rs.10 lakh for my sister’s wedding; I can invest up to Rs.17,000 on a monthly basis.

—Ravindra Ghose

For the short-term, i.e., any period less than five years, it is risky to invest in equity funds. Your only choice for the two-year time frame that you have mentioned is to invest in debt funds. If you save and invest Rs.17,000 for two years, you will likely end up with about half of your required amount of Rs.10 lakh.

Getting all the way to your target amount in such a short time frame would require you to generate an annual return of more than 50% and that is quite improbable. At best, you can consider funds like HDFC Short Term Fund and Franklin Templeton Short Term Fund for your needs.

Can I assign a nominee for my mutual fund units? I was incorporating my Will and wanted my son to be a nominee for my mutual fund portfolio. What’s the process for this?

—Rakesh Mehrotra

Yes, any mutual fund folio can have a nominee to whom the units can be transferred if something untoward happens to the unit holder(s). Having a nominee is the simplest way to transfer units in such situations. Even if you do not have a nominee currently registered for your mutual fund folio(s), you would simply need to fill out a nomination form to make this happen. It would be highly advisable to add a nominee to mutual fund investments, and I would urge you to do so at the earliest.

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