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Invest in ultra short-term funds and liquid funds for near-term goals

LiveMint logoLiveMint 20-09-2017 Srikanth Meenakshi

What is the difference between liquid funds, ultra short-term funds and short-term funds? I have Rs25 lakh as fixed deposits lying in my bank account for the purpose of my daughter’s wedding, which will take place in November 2018 (14 months away). Kindly advise where should I consider parking this money with minimum risk? I understand the money should be kept in debt funds but I am confused, which one to choose. Kindly also suggest a few schemes that I can invest in.

—Dileep Rana

All of these three categories of funds are debt funds that invest in debt instruments of different duration. Liquid funds typically invest in bonds that never exceed a 90-day duration, and hence are considered the safest of all debt funds. Ultra short-term funds have no such restrictions and they typically invest in bonds that mature any time within 18 months. Short-term debt funds can invest in bonds that have even longer duration. Please note that of these three, only liquid funds are mandated by regulation to keep to a duration restriction. The other two categories have a lot more flexibility and, in fact, funds move between these two categories depending on their current portfolio. For your needs, given that you need the money in 14 months, you would do well to stick to ultra short-term funds and liquid funds, especially since you want to take minimum risk. The slightly higher return that you could potentially get from short-term funds would not be worth the risk.

You can consider liquid funds from Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund and HDFC Mutual Fund. For ultra short-term funds, Franklin India Ultra Short Bond Fund and UTI Treasury Advantage Funds are good choices.

I have invested Rs8,000 each in Birla SL Frontline Equity-G, HDFC Equity-G, Franklin India Prima Plus-G, DSP BlackRock World Mining Fund-Direct Plan and HDFC Balanced Fund. Is my portfolio good? My goal is to create a corpus for my daughter’s wedding, which will happen 5 years from now. For this, I will need Rs30-40 lakh. Is my fund selection right? Also, do I need to increase my SIPs to reach the goal?

—Madhav Ram

You are investing Rs40,000 a month in a portfolio that is almost entirely equity (save for a 5% exposure to debt through the balanced fund). It’s a portfolio that’s a bit too aggressive given that the time frame you are investing for is only 5 years. It would be better if you replace one of your funds with a debt fund to bring the asset allocation down to 75:25 between equity and debt. A good candidate for such a replacement would be the mining fund in your portfolio. You can replace it with a debt fund such as UTI Short Term Income fund.

If, on the other hand, you would like to stay aggressive and take on market risks fully in your portfolio, you would still do well to replace that fund with another DSP BlackRock fund, say, the DSP BlackRock Top 100 fund, a large-cap fund. All the other funds in your portfolio are solid, reliable, long-term performers. In terms of the amount of systematic investment plan (SIP), with your current investment, if you keep it up for 5 years, you will likely reach about Rs33 lakh (assuming a 12% annualized return) at the end of your investment tenure. To reach a target of Rs40 lakh, using similar assumptions, your investment would need to be augmented by Rs10,000.

I have SIP of Rs7,000 each in Tata Balanced Fund and Reliance Equity Opportunity Fund, which I had started in February 2016. I got a good hike this year and I want to put that extra money into mutual funds, without wasting it. I can invest Rs16,000 more (total Rs30,000) in mutual funds via SIPs. Please suggest what I should do. Should I increase my SIPs in these funds or should I invest in more mutual fund schemes? I don’t have any near-term goals. I only have my daughter’s education expenses to meet, and that is 14 years away; and retirement plans, which are 27 years away.

—Anmol Agarwal

You are presently investing in a balanced fund and a diversified fund in equal amounts. You will do well to add more categories of funds in your portfolio (given that there are only two funds there) for the extra amount you are planning to bring in. My suggestion would be to add a large-cap fund and a couple of mid-cap funds to your portfolio. You can invest Rs8,000 in Birla Sun Life Frontline Equity fund and split the other Rs8,000 equally between Mirae Asset Emerging Bluechip fund and HDFC Mid-cap Opportunities fund.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com.

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