MF QueryBoard

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of
personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

I want to start a SIP of Rs2,000 per month with an investment horizon of 20-25 years. Could you suggest appropriate mutual fund schemes for me?

- Jashank Worah

To begin with, it is important to understand that there is no best mutual fund as such. This is because the one which is best as of now might not be so the next year. Therefore, rather than searching for the highest rated mutual funds, it is better to build a mutual fund portfolio that invests in various asset classes. Never rely on a single asset class. Rather, it is always prudent to diversify among different asset classes. This will not just reduce your overall risk but would also help you get better risk-adjusted returns. This diversification should always be accompanied by rebalancing your portfolio periodically, preferably annually. Further, you should also review your investments quarterly. This will ensure that you hold funds that match your investment objective.

To understand what funds would suit you we would first need to understand your risk tolerance level. And this is something that is not clear from your query. However, we would highly recommend you to assess your risk profile first. You can assess it online for free from any of the websites of asset management companies (AMC). Here we are assuming you to be a moderate risk-taker and would suggest things based on this assumption. Considering a systematic investment plan (SIP) of Rs2,000, we would suggest you to invest in the following manner:

We have divided your SIP investment among debt and equity. Your asset allocation would stand at 50 per cent equity and 50 per cent debt. As your SIP amount is low, we have considered multi-cap fund rather than having separate investment in largecap, mid-cap and small-cap funds. On the debt part, as your investment horizon is long-term, gilt funds would help you to cushion your portfolio and also give you respectable returns. Also, don’t forget to review your portfolio quarterly. 

I have parked my emergency corpus in liquid funds. However, considering that we have witnessed a few debt events previously and also in recent times, are the liquid funds still safe? Where should I consider parking my emergency corpus? And how much should I hold as an emergency fund?

- Ranjan Dev

At the time of crises, a lot of people get anxious about their investments in liquid funds and this prompts the doubt whether they are safe investments or not. There have been instances where a few liquid funds held papers that helped them to generate better returns but they had to take extra risk. Many retail investors got lured with high returns and expected to earn better than their bank fixed deposits. But those risky papers many a times turned out to be bad investments and eventually liquid funds had to write them down. This has led to fear among investors whether or not to park their money in liquid funds.

But now many liquid funds have recognised this pitfall and have already started being conservative. Hence, technically they are safe though not risk-free. Hence, before investing it is better to check for the papers that it holds and what the average maturity is. It should not be more than 90 days. Further, you can also consider diversifying your emergency corpus. This means that you should not put all your money in liquid funds. You can put some in a savings bank account, some in bank fixed deposits and the rest can be parked in liquid funds and ultra-short duration funds. As to the quantum of emergency fund, this would depend on your fixed expenses. Typically, it is said that you should at least have three to six months of your fixed expenses as your emergency fund.

But we believe that you should have one to one and a half years of fixed expenses set aside for any emergency, even if this requires pulling out from your equity funds and moving to liquid funds. This is because your peace of mind is important and this will assure you the same. It is prudent to review your emergency fund annually. This would help you to account for your change in spending patterns. Also, while investing in liquid funds and ultra-short duration funds, don’t get lured by its performance. Remember, your intention to park your money in such funds is safety and not returns. Hence, give more preference to those funds which offer greater amount of safety with decent average maturity.