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For non-residents, debt funds are unattractive from a tax perspective  (Photo: iStock)
For non-residents, debt funds are unattractive from a tax perspective (Photo: iStock)

US residents can invest in only a few Indian funds

  • The choices to start fresh SIPs or lump sums in India are limited for US residents due to certain regulations
  • The advantage with debt funds is that they are tax-efficient compared to FDs for those in the higher tax brackets

I topped up my emergency fund recently after the covid-19 pandemic struck. But all of it is parked in fixed deposits (FDs) as of now. I was steering clear of debt funds after the Franklin Templeton episode. Should I switch some of it to debt mutual funds now? Which funds should I choose?

—Arti Dua

You can use a mix of FDs and debt funds in your emergency portfolio. The advantage with debt funds is that they are tax-efficient compared to FDs for those in the higher tax brackets.

In debt funds, you will be fine if you stick to liquid funds. Avoid the other debt fund categories where there may be risk either in terms of credit quality or in terms of volatility due to bond price movements. Liquid funds are very low risk and have low volatility; they additionally need to maintain part of their portfolio in government securities to ensure redemptions can be met. They are, therefore, typically not subject to the kind of risk that other categories may have.

You can keep the equivalent of three months’ of expenses in FDs. Hold the remaining in liquid funds with large assets under management such as Kotak Liquid or Aditya Birla Sun Life Liquid. But you can shift the money to debt funds once your FDs mature.

My son, currently a US resident, is investing in monthly systematic investment plans (SIPs) for four years: 5,000 each in ABSL MNC, DSP Smallcap and Franklin India Equity; and 7,500 each in SBI Bluechip, SBI Focused Equity, Axis Multicap and Mirae Asset Emerging Bluechip. He can invest for five more years for wealth creation. Please advise.

—Balakrishna Rao K.

While most individual funds are quality funds, the portfolio itself has very high risk. Funds that can invest across market caps may have high mid-cap and/or small-cap exposure even though it is not categorised as a mid- or small-cap fund. For example, SBI Focused Equity has had up to half its portfolio in smaller stocks, and Mirae Asset Emerging Bluechip necessarily needs to have 35% in these stocks. The risk needs to come down, and five years is also not long enough to weather a high-risk portfolio.

Continue SIPs (with the same amounts) in all funds except Franklin India Equity (it has been lagging the index and peers for a long time) and SBI Focused Equity. Instead, start an SIP of 12,500 in ICICI Pru Equity Savings. This is an equity savings fund which has equity taxation but is low risk as it hedges the equity exposure using derivatives. We are suggesting this fund in place of a pure debt fund, which we normally give. For non-residents, debt funds are unattractive from a tax perspective. Note that investments for US residents are restricted to a few mutual funds due to regulations and as such the choices to start fresh SIPs or lump sums are limited.

Srikanth Meenakshi is co-founder, PrimeInvestor.in

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