Consider when you need the money, when making a portfolio for lump sum amounts

The amount earmarked for emergency funds should be invested in liquid funds or short-term debt (low-risk) funds; the long-term portfolio could be a diversified equity portfolio with ambitious growth objectives


iStockPhoto
iStockPhoto

I invest in two mutual fund schemes via systematic investment plans (SIPs) for tax-saving purposes. However, these funds are not accessible to me for 3 years. Therefore, for my savings, emergency funds and investment needs, I still rely on bank fixed deposits (FDs) and recurring deposits (RDs). Can I use mutual funds for these needs? I can manage a disposable income of Rs30,000 every month.

—Reuben Easow

Tax-saving funds are equity funds that invest in the stock market and hence it’s a good idea to do systematic investments in those funds. However, mutual funds can be used for a variety of purposes other than saving taxes. They can be used for short-term money parking needs, as alternatives to fixed deposits, to have measured exposure to the stock market and for building a long-term portfolio for retirement and other financial goals down the line. All it requires is a little bit of thought and planning, and with that one can leverage this versatile instrument to serve a lot of financial needs.

In your case, if you have Rs30,000 per month that you want to put to good use, you need to start thinking about apportioning it for multiple purposes.

First, you need to save up a certain amount (say, about 6 months’ of income) for emergency purposes. Next, you need to set aside a portion of this money to invest for long-term retirement needs. After these are done, you can consider saving up for other financial goals such as children’s education or for medium-term ambitions such as purchasing a house or a car. So, overall, you can split the Rs30,000 into portfolios of: Rs10,000 for emergency needs, another portfolio of Rs10,000 towards retirement, and two other portfolios of Rs5,000 each for medium-term goals. The amount earmarked for emergency funds should be invested in liquid funds or short-term debt (low-risk) funds. The long-term portfolio could be a diversified equity portfolio with ambitious growth objectives. The medium-term portfolios could be a balanced portfolio with both equity as well as debt funds so as to manage the risk better. Overall, the goal is to take a thoughtful, portfolio-oriented approach to investing with the help of a simple and personalised financial plan for your future.

Can I continue investing in SIPs even after I become a non-resident Indian (NRI)? I want to save this amount for my parents who are in India.

—Shreyanshi Pandit

The general answer to this question is yes, you can. However, in order to continue doing so, you would need to take care of your know-your-customer (KYC) details first and subsequently change your bank account to a non-resident account. You would also need to stop and re-start your SIPs from the new bank account. The KYC registration contains your residency status and it needs to be updated to NRI, along with an overseas address. Once done, you would need to stop your ongoing SIPs and start a new one using your NRO or NRE bank account (as the source of funds for the SIP investments).

Please note that if your new country of residence is either the US or Canada, you will be subject to additional conditions as many asset management companies (AMCs) do not accept investments from residents of these countries. Some AMCs that do, may have additional paperwork for you to complete in the form of declarations. You would want to check with the AMCs where your SIPs are running, for the specific details.

I retired last month and received Rs60 lakh from my provident fund (PF) and gratuity. I own my house and would get a pension of about Rs70,000. How can I invest this money in mutual funds without taking on too much risk? We already have a house and no liabilities as such. My wife and I wish to start a small school for under-privileged children in our ancestral village in Uttarakhand.

—Rajiv Singh Rawat

I am assuming you are seeking advice about where to invest the money that you received from PF and gratuity. Assuming that your pension will take care of your regular monthly needs, you can decide on the portfolio for this lump sum investment depending on when you will need to use it, i.e., when do you plan to realise your wonderful vision of building a school for the less-privileged children.

If your plan is to utilise these funds within the next year, you would need to invest them in very low-risk options such as ultra-short-term debt funds and liquid funds.

If your time frame is more than a year, but less than 3 years, you can go for short-term debt funds.

If your horizon is longer than that, you can consider some exposure to debt-oriented hybrid funds or monthly income plans (MIPs) to try and obtain some extra returns from the market.

Essentially, it is a matter of tuning the risk in your portfolio according to how far your goal of building the school is.

If you need the money in multiple tranches, you can split it up according to the time frame for each tranche, and invest in appropriate types of funds.

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

Queries and views at mintmoney@livemint.com

More From Livemint