Don't time the market

Fund Queries

I wanted to invest nearly Rs 10 lakh in mutual funds, but do not want to invest all in one go. Instead, I would like to divide it into, say, 15 different purchases. If I buy mutual fund schemes regularly on every dip in the market each month, rather than going through the SIP route, will that be beneficial?

-Anand

You should not attempt to time the market. Equity funds are a good way to invest for long-term investments. An SIP is a good way to approach as trying to time your investment on dips may be difficult to implement. When markets go down sharply, we get scared and wait for the next fall and markets turn around to go up when we least expect them to go up. With

 

SIP, one is able to invest in equity funds with less anxiety. You should focus on two things – choosing a few good diversified funds with a track record of providing superior risk-adjusted return at least over a fund market cycle. And the SIP period -- over the next 12 months, 18 months or 24 months, based on your own views on the market outlook.

My father is retired and has around Rs 5 lakh. He wishes to invest this amount in a good long-term debt fund, whose returns can beat the inflation and fixed deposit (FD) rates. Could you suggest some the type of debt funds will be the most suitable for his risk-return profile?

-Suhas Verma

Medium-term debt funds can provide more returns than bank deposits and possibly, protect against inflation too. But debt funds can go down in value and they are not completely risk-free. These funds deliver higher return when interest rates go down and lose value when rates go up. Besides they also carry credit risk on their investment. The return from these funds is more tax efficient as they are treated as capital gains if held for one year. A well-rated, medium-term debt fund can be a good choice.

For investors seeking risk-free, fixed return, these funds may not be suited. Instead, a bank fixed deposit is safer with high liquidity. Currently, some banks give up to 11% interest rate to senior citizens.

I am looking for investments that can help me save tax with a minimum investment tenure and also, earn some return on it. What are the options available for me?

-Shailendra Koshle

Though there are different tax-saving instruments available, you can choose one depending on the time, for which you intend to remain invested and also on the basis of your return expectations.

Equity-linked savings schemes (ELSS) have the shortest lock-in period of three years. But a three-year investment is not recommendable for any equity investment. These funds can also generate better returns than other tax-saving instruments in the long run, but a three-year holding can also prove disappointing. You can choose from well-rated ELSS funds like Magnum Taxgain, Principal Tax Savings, Sundaram Tax Saver, etc.

The relatively less riskier option is the mutual funds’ pension plans. The two existing funds -- Templeton India Pension and UTI Retirement Benefit Pension -- are hybrid debt-oriented funds. They are less riskier than ELSS funds due to limited exposure to equity and hence the returns are also not as high as in ELSS.
 

TAX SAVING AVENUES
Instruments	Tax ExemptioFn Up to (Rs)	Mini. Holding    Period
Equity Linked Saving Scheme	1 lakh	3-Years
Bank Fixed Deposit	1 lakh	5-Years
Post Office Time Deposit	1 lakh	5-Years
Senior Citizen Saving Scheme	1 lakh	5-Years
NSC (VIII Issue)	1 lakh	5-Years
Pension Fund (Issued by Mutual Fund)	1 lakh	3-Years
Public Provident Fund (PPF)	70,000	15-Years

Apart from mutual funds, there are other tax-saving instruments like bank fixed deposits, post office time deposits, senior citizen savings scheme, NSC, public provident fund, etc, though the minimum holding period is higher in these cases. Also one must bear in mind that the returns will not be very impressive.

I am a retired person. I had invested a lot of money in mutual funds and shares in 2006-07. Those funds and stocks were performing well then, but in the recent market crash, all my investments have made huge losses. Though I do not need the money for another three years, I wish to know if I will be able to recover the losses and make some profits, if I stay invested? I understand that selling now will result in a huge loss. Should I continue investing through SIP or stick to fixed deposits? 

Majumdar

Ideally, equity investments are meant for a longer-term horizon of five years and above. It is very risky to invest in equities with a shorter timeframe. Since you are a retired person and will be in need of funds in about three years, you should have kept most of your investments in debt instruments to cut down the risk of capital erosion during market downturns.

In the recent crash, almost all funds have slipped substantially from their 2007 NAVs and thus it is quite natural that your investments have made losses. Had you invested at least three years prior to that, you would have still made some gains. This is the benefit of long-term investment in equities.

As of now, it is impossible to predict when the market will take an upturn, but since you have mentioned that your funds and scrips are good, you can still wait for some time rather than redeeming your investments and making losses now. Gradually, you can redeem your investments and transfer the amount into debt funds, which suit your timeframe.

Value Research