I want to start investing in mutual funds (MFs). I have no understanding of market risk. I don't have a demat account. Can I still invest Rs 20,000 a year in MFs? Which is the fund I can invest in for tax benefit?
- Arvind Kumar
When you invest in equity MFs, you are right away exposed to market risk. As a unit holder, you proportionately own part of the business in which the fund you own has invested in. Market risk is a multi-dimensional concept that manifests itself in various ways and is reflected in the volatility of the market indicators. Risk is often misunderstood, too. For instance, safe investments such as bank deposits carry the risk that the rate you earn will not exceed the rate of inflation.
For a new investor, we suggest a balanced fund. These have only 35 per cent equity exposure, which brings stability to their performance and insulates the returns from market volatility. Invest in a systematic and regular manner in these funds to get into the habit of investing and experience the performance of your investment in these. You can consider funds such as HDFC Prudence and Reliance Regular Savings Balanced Fund.
As for a tax-saving MF, these are funds with full equity exposure. Investments in these qualify for tax deduction under Section 80C and have a three year lock-in. Some good ones to explore are Fidelity Tax Advantage, Canara Robeco Equity Tax Saver and Religare Tax Plan. However, after March 2012, the new direct tax code kicks in, doing away with the tax advantage that funds in this category possess.
I am a 51-year old and plan to retire after a couple of years. I have a lump sum of Rs 5 lakh in fixed deposits and I can invest Rs 15,000 a month for use in retirement. Please let know what are the best funds to invest in?
- Dinesh Mewada
At 51, you are a bit late in the day to invest, especially if you have not had any equity exposure. You do not get the advantage of long-term equity investing. However, you can still consider investing in mutual funds, especially with about 10 more years to go for retirement.
You can still consider investing in a balanced fund to get the upside of equity over the next five to seven years and then move your investments to a debt fund or instruments that will offer you fixed returns as you wish to utilise in retirement. Your bank FD currently runs the risk of not even matching inflation and is tax-inefficient as you pay tax on the returns you earn from this type of savings. More, if these investments are all that you think will fund your retirement incomes, you run the risk of outliving your savings. It may be a good idea to increase your planned investment of Rs 15,000 a month to Rs 25,000-30,000 over the next five to seven years, which may still work towards building a corpus that you can utilise in retirement.
I had invested in Fidelity Tax Advantage for four years with systematic investment plans (SIPs) and have stopped. I am happy with its performance. After discontinuing in Fidelity, I started investing in DSPBR Tax Saver through SIP, which expires in a month. Is it wise to continue the SIP, as I heard ELSS comes to an end after March 2012?
- Sateesh Gopal Chelikani
Investing in mutual funds through SIPs is a good move, as you get the dual benefit of long-term investing and averaging. Both the ELSS funds you have invested in are good and you should continue investing in these. This way, you get the benefit of tax deductions and the potential to grow your investment over the three year lock-in. In fact, you should consider continuing in the fund where you have stopped the SIP, to make the most of the remaining window of benefits that tax planning funds have.