Here’s a plan for a conservative investor who aims to earn a regular income/pension from his investments in mutual funds and expects a return that is better than what bank fixed deposits offer him at this point.
- The Indian equity market is expensive on today’s date. The current PE (price to earnings, one of those markers that show how expensive the market is) of the NIFTY is near 22 against a historical average of 18. See here.
- Hence, it won’t be wise for our conservative investor to invest a lump sum in an Equity Fund (that invests almost 100% in equities) or even a Balanced Fund (with at least 65% in equities) right now.
- Among the Debt Funds, the Short Term Debt Funds are the most stable (longer term bond funds are more volatile) although they won’t give you the highest returns in the long term. Still the short-term funds are much better than bank fixed deposits with an average annual return of about 9% per annum. See here.
- There is little difference between the Liquid Funds and the Short Term Debt funds in their risk profile. The short-term funds invest in slightly longer duration papers and some of these may have an exit load (deduct a small percentage) if you withdraw money within 15/30 days of your investment. But the short-term funds would give you an additional 1 to 1.5 percent return compared to the liquid funds.
- I would recommend an investment of 80 to 90 per cent of your corpus in two or three short-term debt funds (select the 4/5 star rated funds from the above list and while selecting please check the expense ratios of the funds (the lower the better). Opt for the Growth option and after one month initiate an SWP (systematic withdrawal plan) so you withdraw 7.5-8% (what an FD would offer you) of your investment in that fund every month or every quarter. At the present rate your initial investment should still grow!
- Keep the rest (10-20%) of your corpus in another short term debt fund and wait for the market to fall. At opportune moments, when the PE has come down substantially (20 or lower), switch some portion of this investment to a Multi-Cap Equity Fund. See here. These funds invest in all kinds of companies: big, medium and small, their world is not limited to any specific sectors and, as such, they are the most diversified. You can stagger this investment, doing it in several tranches to get the benefit of market volatility. The general principle is you should increase the amount you switch with each fall.
If the market never falls, your money is still safe in your fund and you can keep it and use it as an emergency corpus at any point of time.
[Disclaimer: What is suggested above is by way of guidance only. I am not a financial adviser and I am not asking anyone to follow this guidance. I had to write this short note for a friend and am uploading it here with the hope that it may help a few thers too. Readers should make investments only after proper assessment of their risk profile and at their own risk.]Read More