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Park your money in liquid funds to get higher returns than on savings account

LiveMint logoLiveMint 19-09-2017 Suresh Sadagopan

I have read in many articles that liquid funds are better than bank fixed deposits if you want to invest for a short term. I wish to start making some investments in mutual funds and begin with something that is less risky. Kindly advise on how I should choose a liquid fund.

—Marion Saldanha

A liquid fund is one where the underlying investments are real short-term papers (up to 91 days) like T-bills, government securities, overnight debt securities, and others.

The credit rating of these papers is generally high and due to the short tenure nature of the underlying funds, the risk is low. These funds, on an average, are offering about 6.5%, which is significantly higher than what savings accounts are generally offering, which is 3.5%. Hence, liquid funds score on the return front. Liquidity is high and assured as mutual funds are the counter party. Choosing a liquid fund should not be a difficult exercise at all. Since all liquid funds are low-risk, the only real differentiator would be the expense charged, which would reflect in the scheme performance. Lower the expense ratio, the better it would be for you.

I am 30 years old and want to start planning for retirement. My retirement is 30 years away as I will retire at the age of 60 years. What factors should I keep in mind?

—Arun Jaipal

Thirty years is a fairly long period in which you can plan for your retirement. The first thing to keep in mind is to resolve never to touch the money kept aside for retirement, for any other purpose. This is usually the problem as retirement is a long way off and a holiday seems too exciting to pass up for something that is going to come 30 years hence.

At 30, you could take a fairly aggressive call on your allocation to equity as your risk capacity would be good now. But risk tolerance, even for a 30-year-old, can be anywhere between low to high on the slider scale. Hence, you need to assess that before allocating resources among asset classes.

Consistent and disciplined investments throughout the period would ensure accumulation of a good corpus. There should be a certain sum going towards retirement every month and over time, this figure should go up. As the salary increases, one should also augment allocations towards retirement, as necessary. Similarly, any bonus, ex-gratia, or incentives, which one may receive, should also be used to augment the retirement corpus as may be necessary.

I took an education loan for my higher studies . I wish to finish paying off my loan in the next 5 years. I have to pay back a little less that Rs5 lakh in all, including principal and interest. I earn Rs80,000 a month post-tax and want to save in order to be able to pay off the loan in 3 years. Where should I invest?

—Nitika Bahl

Education loan is not a high-cost loan if one takes into account the tax breaks given on such loans. You would be aware that the entire amount you pay as interest would be available as a deduction. Suppose your education loan interest is 12.5% and you are in the 20% tax slab, your effective tax would be about 10%, which is not very high.

Hence, you could even look at allowing the education loan to continue and invest your money in avenues that have the potential to earn more than this. However, if you have set your mind on paying back the loan in 3 years, you may probably have to invest in debt funds only to accumulate a corpus for that purpose. I am not suggesting equity funds as the 3-year period is a short time frame for equity.

Suresh Sadagopan is the Founder of Ladder7 Financial Advisories.

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