Ramesh Pathania/Mint
Ramesh Pathania/Mint

Asset classes should be chosen according to time horizon

If your time horizon is more than 10-15 years consider taking a higher equity exposure.

I have inherited 30 lakh in fixed deposits (FDs). I want to put aside this money for my son’s education. Should I keep this money in FD or should I consider other options? I was suggested to look at a portfolio management service (PMS). However, I don’t know much about it. Is it too risky? I am not willing to take much risk.

—Karthik Pal

The asset class to be used for creating a corpus for your son’s future needs should be based on your time horizon. If you have a relatively longer period (five years or more), you should consider taking some risk and invest in equity. In case the period is even longer (10-15 years or more) then consider taking a higher equity exposure. Only in the scenario when the need is only couple of years away, you should stay away from equity. However, the investment can be made after the need of fund has been assessed.

The next question is where to invest? Investing in FD is recommended if the horizon is short term. And here, your marginal rate of tax will come into effect, as what matters really is the net return in the hands of the investor. If you come under the higher marginal rate of tax, then look at tax-efficient investments such as fixed maturity plans. These are available for a duration of one-three years. However, they don’t offer you liquidity, which a bank deposit offers. The other option is mutual fund. Some of the funds which you can consider are Templeton India Short Term and Birla Sun Life Dynamic Bond. You can even consider conservative monthly income plans (MIPs) which takes a equity exposure limited to 10% and you can opt for Birla Sun Life MIP II Savings 5.

As you are not keen on taking much risk but do have a long-term horizon, equity as an asset mix is recommended. You can consider hybrid funds and aggressive MIPs. Hybrid funds invest a minimum of 65% in equity and the balance is invested in debt. However, they offer the tax advantage of an equity fund—if held for more than 12 months from the date of investment, they are tax free. You can consider funds such as HDFC Balanced and HDFC Prudence. Another fund which you can consider is FT India Dynamic PE Ratio FOF which changes exposure to equity based on the price-earnings of the markets. This fund is ideal for long-term investment. And while for taxation it is treated as a debt fund, if held for long term the same becomes tax efficient. In the aggressive MIP space, HDFC MIP-Long Term is a good option.

PMS are high risk investments and are typically mandated to invest in a particular sector or even if diversified, take concentrated calls leading to higher risk. PMS typically is more expensive and also have not been able to deliver returns justifying its cost.

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