Ultra short-term funds are riskier than liquid funds but less risky than all other debt fund categories

Ultra short-term funds are riskier than liquid funds but less risky than all other debt fund categories

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I want to invest Rs60,000 in ultra short funds. Please suggest which fund is doing well?

—Anush

Ultra short-term funds are funds that invest in money market instruments and commercial papers with high liquidity and short maturity periods. They are slightly riskier than liquid funds but less risky than all other debt fund categories. An investor looking to invest for a period of 6 months to a year can consider such funds. For your requirement, you can consider UTI Treasury Advantage fund and Tata Ultra Short Term fund as investment choices.

My father is going to retire in August 2018. He has never invested in mutual funds or stocks or any other elements. I need a proper plan (mutual funds and other options) for the amount which he will get after retirement with which he can get good returns (monthly or yearly).

—Mahadev Sawant

Planning for post-retirement investments, especially for any lump-sum received at the time of retirement, should be done with great care since the money represents the fruits of a long career, and investors would be wary while handling it. Please take this answer as providing general pointers for this purpose. Any specific decision would need to be taken in consultation with a financial adviser.

First, an investor would need to consider fixed income options. The post office Senior Citizens’ Savings Scheme offers the best fixed returns today, and retirees should consider this first. Similarly, RBI’s 7.7% bonds that provide half-yearly payouts are also good options to consider. And finally, with interest rates in deposits set to rise, some amount in top-rated (AAA) corporate deposits along with regular bank deposits is a good idea in a year’s time from now. Interest from these options are taxable. Hence, if you are in the lower tax bracket, you must consider the above first.

Second, when it comes to mutual funds, as a diversification option, or if you are in the high tax bracket, you can consider investing in ultra short-term and short-term debt funds to generate monthly cash flows for yourself. You can decide the amount you need and set a systematic withdrawal plan (SWP) for this purpose. Do not depend on dividend options of mutual funds. SWP from debt funds ensures regular cash flows and are far more tax efficient (you pay much lower taxes) than regular fixed income options.

Finally, if the above generate sufficient income for you, then parking the surplus corpus in equity funds for the long term will help build wealth. Please note that it will always be available for you in future to dig into, and ensures you do not run out of corpus. This will also ensure that you do not compromise on wealth accretion and make sure you pass on the wealth to your heirs. It is also the most tax efficient option for long-term wealth building.

I am currently investing Rs16,000 through systematic investment plans (SIPs) in the following: Reliance Tax Saver Fund (G), Axis Long Term Equity Fund (G), ICICI Prudential Long Term Equity Fund (G), Franklin India High Growth Companies Fund (G) and SBI Magnum Balanced Fund (G).

I am planning to start an SIP of Rs4,000 and looking for a debt-oriented scheme to invest in, so that I can balance the asset allocation down to 80:20 ratio. Please advise which mutual fund to invest in.

—Aditya Anjaneya

You are presently investing a monthly amount of Rs11,000 in tax-saving funds. That works out to Rs1.32 lakh a year. I hope you are getting full tax-deduction from this investment under section 80C (where the maximum amount of deduction is capped at Rs1.5 lakh). If not, I would advise you to move to open-ended diversified funds in their place, so that your investments are not subject to any unnecessary lock-in periods.

Having a balanced portfolio is a good idea. You can invest in short-term debt funds such as HDFC Regular Savings fund and UTI Short-term Income fund for the Rs4,000 you are planning to bring into your SIP schedule.

I have two large-cap schemes—HDFC Top 200 and SBI Magnum Equity—in which I have been investing for over 5 years now. About 3 years back, I started investing in mid-cap mutual fund schemes too, and now have three such schemes, owing to the superlative performance of mid-cap scrips. Should I now redeem my units from the mid-cap schemes? I had bought them purely for returns, and not pegged to any of my financial goal.

—Aman Kanth

Mid-cap funds have a key role to play in any long-term portfolio, in terms of enhancing long-term returns. They need not be reduced to merely momentum plays. The risk arises when one goes overboard on these funds. In a fall, the pain can be high and recovery would sometimes be delayed or denied if the fund quality dwindles. Hence, it is always a good idea to mix multiple funds across market-caps and across strategies to build a long-term portfolio, even if it is not a goal-based portfolio. You can consider 20-30% of your portfolio in mid-cap funds. What you need to, however, do is: one, review mid-cap funds every year and see if the fund’s size or change of fund manager or any change in strategy has caused any significant performance dip over peers; two, ensure that if the allocation to mid-caps shoot up because of high delivery in this category, you rebalance it either to move to large-cap funds or balanced funds or if your equity-debt allocation itself goes out of kilter, book profits in this category and move to debt. You don’t have to sell them; just trim them if they cross the allocation suggested earlier, by 5 percentage points or more.

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