BackAverage out investment cost using systematic transfer plans
Thumb rule for investing in a systematic transfer plan (STP) would be to deploy the money within 20% of the time that one plans to invest for
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I wish to invest about 12 lakh in mutual funds (MFs) for 2-4 years. How do I go for a systematic transfer plan (STP)? I plan to put my money in top 3 equity diversified funds and one gold exchange-traded funds (ETFs).
—Ranjeet Krishnan
To answer the first query of how to invest, one has to evaluate the options based on the time period of investing. STP is better than investing the money in one go, as it gives you the benefit of averaging your cost of investment over several instalments. However, what this does is reduce the time in the market for your investment as the money gets deployed only in parts and not as a whole.
A thumb rule for investing in an STP would be to deploy the money within 20% of the time that one plans to invest for. Say, if one were to invest for 5 years, then the money should be put in 12 monthly STP instalments. For you, given a 2-4-year time frame, it would be better to complete the STP in 6-9 monthly instalments.
Coming to where to invest. As your time horizon is relatively short, your choice of investing in three diversified equity funds and a gold ETF would be a very aggressive approach. A more balanced way would be to invest 50% of your portfolio each in equity debt funds. For debt funds, you can choose to accommodate the gold investment (up to 10%).
You can go with a large-cap fund such as ICICI Prudential Focused Bluechip fund and a diversified fund such as Franklin India Prima Plus as your equity fund. For debt funds, you can go with short-term funds such as UTI Short-term Income Fund.
I want to invest 15,000 every month in 5-6 MFs via a systematic investment plan (SIP) over 10 years with minimum risk. I want to save tax and grow the capital.
—Sarvesh Goel
With a minimum lock-in period of three years and full exposure to equity markets, equity-linked savings schemes (ELSS) are ideal for both tax-saving and wealth-building purposes. But these come under the 1.5 lakh per year cap under section 80C of the Income-tax Act, 1961, which also includes insurance premiums and home loan interest payments.
So, after taking care of home loan and insurance needs, see what’s left. Divide this by 12 to derive at the monthly amount you can invest in ELSS. Design your SIP portfolio around this.
For example, if you can invest 5,000 a month in ELSS, go for Axis Long-term Equity Fund. The remaining 10,000 can go to balanced portfolio of equity and debt funds.
Considering the tenure of your investment and your low risk tolerance level, I would recommend you split the non-ELSS portion of your monthly SIP amount in a manner that your overall portfolio has a 60:40 ratio between equity funds and debt funds.
You can go with diversified funds such as Mirae Asset India Opportunities and Birla Sun life Frontline Equity Fund for the equity part, and short-term funds for the debt part.
Queries and views at mintmoney@livemint.com
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