MF-Query Board

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 

Presently the markets are quite volatile. So, does it make sense to invest a lump sum of `75 lakhs if my investment horizon is 15 years? - Ram Pandit

It may have taken years to amass this lump sum amount or you could have received it as a lump sum amount from a property sale or as a lump sum amount from an employee provident fund (EPF), but we don’t know the source and hence can’t determine the purpose of investing. As a result, we assume you are not retired and that your retirement is 15 years away. In such a circumstance, we would advise you not to invest the entire cash at once. Instead, begin a systematic transfer plan (STP) to distribute this investment over the following three years. We advise you to do so since your investment horizon is rather lengthy and lump sum investments should be utilised as a supplement to your existing assets.

However, because you haven’t specified anything about your existing assets, we can’t provide any recommendations for top-ups. Because markets may be fairly unpredictable in the near term, spreading your lump sum investment over the following three years with monthly STPs will protect you from any severe surprises. As we have recently witnessed, foreign institutional investors (FII) and foreign portfolio investors (FPI) have been net sellers, causing the markets to become volatile. Investing methodically at this turbulent moment is therefore recommended. We would also advise adopting a prudent strategy and spreading the lump sum investment over three years, or if you have an aggressive risk profile, spread it over 12 months.

Further, it is critical to determine which fund to invest in. So, if you are conservative, we recommend investing in two balanced advantage funds, and if you are adventurous, we recommend investing in an equal-weighted portfolio of large-cap index funds, Mid-Cap funds, and small-cap funds. We have picked the top five balanced advantage funds assuming you are a cautious to moderate risk-taker.

I wish to have exposure to gold but I am confused between sovereign gold bonds and gold ETFs or mutual funds. Are SGBs a better option than gold ETFs of mutual funds? 
- Satvik Jain

If you want to invest in gold, sovereign gold bonds (SGB) are unquestionably preferable to gold exchange traded funds (ETF). This is because in addition to profiting from increases in gold prices, SGBs give a basic interest rate of 2.5 per cent each year. Gold ETFs or mutual funds, on the other hand, only benefit from increases in the price of gold. So, theoretically, you get an extra 2.5 per cent return from SGBs in either case. SGBs have no ongoing cost of ownership whereas gold ETFs or mutual funds have an expense ratio of up to 1 per cent.

As a result, whether you invest in gold ETFs or mutual funds, you must bear this expense. Thus, SGBs outperform gold ETFs and MFs in terms of cost. SGBs outperform gold ETFs and mutual funds even in terms of taxes. This is due to the fact that when you invest in SGBs, the capital gains you get from the increase in the price of gold are fully tax-free. The sole tax component here is the 2.5 per cent interest tax, which is applied to your income and taxed according to your individual tax bracket. In the case of gold ETFs, however, your capital gains would be added to your income and taxed at your income tax bracket rate if the gain was short-term. If the gain is long-term, it is taxed at 20 per cent with an indexation advantage.

It should be emphasised that the same taxation applies to SGBs if they are exited prematurely. Gains on SGBs are tax-free only if held until maturity. The only area where gold ETFs or MFs outperform SGBs is liquidity. Liquidity in the case of SGBs for the first five years is not available. However, after five years, you can redeem them directly with the Reserve Bank of India (RBI), but you can only sell them on a stock market where liquidity is still an issue. On the other hand, most gold ETFs have decent liquidity and trade in decent quantities on stock exchanges.