I maintain a balance of around Rs 2 lakh in my savings account. Given the scenario of rising interest rates, will you suggest moving this amount to liquid or ultra-short term funds for better returns? How much return can I expect? What are the advantages?
There are a couple of options you can consider. You can create a fixed deposit of this amount and create an overdraft against it for emergencies. However, for the duration you are utilising the overdraft, you may have to pay interest at a rate higher than what you are receiving on the fixed deposit. You can also create a fixed deposit that gets broken only to the extent of your withdrawal, so as to enable you to earn interest on the balance amount. In the case of liquid or ultra-short term debt funds, your returns will vary in accordance with the prevailing interest rates. In most cases, these funds allow you partial redemption without any exit load. Also, the money can be accessed in a day.
My son started working last month and wants to invest in the equity markets. He can invest up to Rs 10,000 a month. I advised considering the systematic investment route in mutual funds. Please suggest what kind of funds to invest in and how much should be invested. Also, what is better — growth options or dividend options? What are the pros and cons of both?
Your advice seems good, as disciplined investing in equities through SIPs could help him create long-term wealth. The number of funds is not as important as the quality and their track record. Moreover, their investment styles should match his risk-return profile. Having said that, it would always be wise to diversify the SIPs across a few funds.
In terms of dividend and growth options, according to the current income tax scenario, they would not make much difference to a long-term investor, since dividends as well as long-term capital gains are tax-free in the hands of the investor.
When markets fall, investors get good opportunities to pick up value buys. Is it possible to use a similar strategy for mutual funds, buying units of good funds on days when the markets fall, and, as a result, the funds net asset value falls? If yes, how can one do so? If the market falls today and I immediately issue a cheque to my distributor, what NAV do I get?
Of course, you can. However, please understand that mutual funds are not suitable for traders. They are meant for longer-term investors. Therefore, a day-to-day approach towards investments is not advisable. But, as an investor, if you feel that markets have corrected substantially on a particular day and want to enter the markets on that day itself, you will have to ensure your application reaches the fund house and gets time stamped before 3 pm to get the same day’s closing NAV.
The writer is director, Touchstone Wealth. The views expressed are his own. You can send your queries to yourmoney@bsmail.in
