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Before investing in mutual funds, identify goals and time horizon

This week, your money-related questions are answered by Team Mint Money

Where should I invest my savings for maximum returns? In mutual funds?

— Shipra Abraham 

You must understand three factors well before committing to equity investments—your financial goals, time horizon and risk appetite. Since you are asking about mutual funds, I am assuming you mean equity mutual funds and you are comfortable with equity investments. This leaves you with financial goals and investment horizon.

Once you identify your goal, you will automatically get a sense of the time horizon. Equity investments are recommended for long-term goals that have a time frame of more than 7-10 years. Mutual funds are a good way to invest in equities and you can take a look at Mint50, our curated list of mutual funds, to choose from. 

I am 56 and nearing retirement. How do I manage my money? 

— Saroj Kukreti

You have around 4 years to retire and by now you must have a fair idea of the monthly income you will require post-retirement. If not, then this is the starting point of managing your money. Start by assessing your cash flows. You can subtract big-ticket liabilities and other expenses that you will no longer be incurring post-retirement and that should give you a sense of the monthly income you need. This, in fact, becomes your financial goal and it’s important you get your investments in line with this goals. To get into specifics, we will need more details from you, but the big picture is that you need to take stock of your asset allocation and prepare for two things: a monthly income that ensures a comfortable lifestyle and investments to battle inflation over a period of time. Additionally, make sure you have an emergency corpus, a health insurance policy and home insurance, if you own a house. 

Which is the best mutual fund to invest in before March 2018, to avail tax benefits of Rs1.5 lakh?

—Godrej Sachinwalla

To avail tax deduction benefits at the time of investing, we suggest you put your money in tax-saving equity funds, also known as equity-linked savings schemes (ELSS). These are diversified equity funds that aim to invest in shares of companies across sizes and sectors. These funds come with a 3-year lock-in. So, you can’t take your money out before that since you get a tax deduction upfront, at the time of investment. The gains that you make from such funds are exempt from income tax as withdrawal of equities after 1 year is exempt from capital gains tax.

Bear in mind the 3-year lock-in here, though. There are three ELSS funds that form part of Mint50: ICICI Prudential Long Term Equity Fund, Invesco India Tax Plan and L&T Tax Advantage Fund. In the absence of other information, we assume that you would want to invest the entire amount of Rs1.5 lakh in a tax saving fund. Still, we suggest that you pick no more than any of these three funds. For better tax planning, we suggest a 6-9 month systematic investment plan that should get over by December, so you may submit proof of the investment to your employer in January. It looks like you haven’t yet invested in a tax saving fund for financial year 2018, so we suggest you invest the entire money in one go.

Should I buy bitcoin? What is its future? 

—Vipul Kalia and Sriram Mani

The rising interest in bitcoins is due to the sharp spike in its prices in 2017. Prices have increased in the past year due to various events, technology advancement and sentiments. But there are no fundamentals that back this rise. 

The rise in prices should not be the factor on which you base your investment decisions. For any investment, some basic rules are applicable. Invest in instruments that you understand. If you don’t understand a product, you should stay away from it. If you still want to invest in it, educate yourself about it first.

Currently, there is a lot of uncertainty around bitcoins. For instance, in India, the regulators and the government are still trying to understand whether to treat it as a currency, a commodity or an asset class. We will have to wait and watch the regulators’ moves. 

Queries and views at mintmoney@livemint.com.

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