Mu­tual funds are al­lowed to use de­riv­a­tive op­tions only to the ex­tent of hedg­ing of cash po­si­tions


I am 29 years old and earn around Rs25,000 per month. I want to in­vest in mu­tual funds through SIP. I can in­vest up to Rs2,000 per month for 20 years. Can you sug­gest what kind of mu­tual fund should I in­vest in?

—S. Praveen Ku­mar It is good that you are start­ing your in­vest­ment port­fo­lio at a young age, and im­por­tantly choos­ing to in­vest sys­tem­at­i­cally for the long term. For a start­ing in­vest­ment, given the amount you are plan­ning to in­vest ev­ery month, a sim­ple bal­anced fund would meet your needs well.

You can start in­vest­ing in a fund such as Birla Sun­life Bal­anced 95 fund. How­ever, please note that this should just be a starter fund for your port­fo­lio.

As years go by and your in­come grows, you should in­crease your SIP con­tri­bu­tion ev­ery month and start in­vest­ing in a goal-ori­ented man­ner (with a def­i­nite pur­pose and fixed time­lines).

That would be the proper way to main­tain and nur­ture your in­vest­ment port­fo­lio. You are be­gin­ning well, but you will re­al­ize the full ben­e­fits that mu­tual fund in­vest­ments can bring to your fi­nan­cial life only if you keep grow­ing your in­vest­ment con­tri­bu­tions in a planned man­ner.

I want to in­vest in F&O seg­ment through mu­tual funds. Are there any schemes that in­vest in it? If so, kindly sug­gest few schemes. I can in­vest up to Rs3 lakh lump sum. Is it rel­a­tively safer? How should I de­ter­mine if it is re­ally for me or not?

—Amanda Fer­nan­des Fu­tures and Op­tions (F&O) are fi­nan­cial in­stru­ments that are col­lec­tively re­ferred to as ‘de­riv­a­tives’ since they de­rive their value from an un­der­ly­ing fi­nan­cial in­stru­ment.

Mu­tual funds are al­lowed to use de­riv­a­tives only to the ex­tent of hedg­ing (pro­tect­ing against losses) of their cash po­si­tions.

Hence, mu­tual funds may not be the ideal op­tion for par­tic­i­pat­ing in F&O. If you are merely view­ing them as hedg­ing op­tions, then a cat­e­gory of funds called ar­bi­trage funds will suit your needs.

There is also another cat­e­gory of eq­uity funds called eq­uity sav­ings/eq­uity in­come scheme. These funds partly hedge eq­uity po­si­tions and leave the rest un­hedged and also take some amount of debt.

That is, they in­vest in eq­uity, debt, and some de­riv­a­tives, pro­vid­ing a blended re­turn from these as­set classes. Please note that in both of these cat­e­gories, up­side re­turns will be capped as the hedg­ing re­stricts full eq­uity par­tic­i­pa­tion.

I can in­vest Rs20,000 per month via SIPS. I am an ag­gres­sive in­vestor and want only eq­uity ex­po­sure. My goal is to cre­ate at least Rs15 lakh by 2021 (50 months). Kindly sug­gest some schemes to in­vest in. Also, would I need to in­crease my in­vest­ment to achieve this goal? If re­quired, I can in­crease my SIP in­vest­ment grad­u­ally from next year. Kindly also sug­gest the per­cent­age in­crease each year.

—Ar­nesh Chakraborty In­vest­ment out­comes are a mat­ter of prob­a­bil­ity, since they are mar­ket linked and mar­ket move­ments can­not be pre­dicted with ac­cu­racy.

If you in­vest Rs20,000 a month for 50 months, and if your in­vest­ments re­turn 18% an­nu­ally, you will be able to reach your goal of Rs15 lakh at the end of the ten­ure. An 18% an­nu­al­ized re­turn over the next 4 years is a pos­si­ble, but not a prob­a­ble event.

How­ever, if you in­crease your monthly in­vest­ment to Rs24,000 a month, even a 10% an­nual re­turn will get you to your goal.

So, to play it safe, I would sug­gest that you in­crease your monthly SIP to as close as pos­si­ble to Rs24,000 as soon as you can, and im­prove the like­li­hood of your reach­ing your fi­nan­cial tar­get.

Re­gard­ing schemes, you can go with a five fund port­fo­lio in the form of a large-cap fund (Aditya Birla Sun­life Front­line eq­uity fund), a cou­ple of di­ver­si­fied funds (Franklin In­dia Prima Plus fund and ICICI Pru­den­tial Value Dis­cov­ery fund), and a cou­ple of mid-cap funds (Mi­rae As­set Emerg­ing Blue chip fund and In­vesco In­dia Mid­cap fund). This would be, as you de­sired, a very ag­gres­sive, all-eq­uity port­fo­lio.

I would rec­om­mend that you watch this port­fo­lio closely as you get near the end of your time frame, and start se­cur­ing some of the prof­its in debt or liq­uid funds to safe­guard your gains so that they are avail­able when it’s time.

You have said that if in­come is er­ratic then one should take the STP route for in­vest­ing. But if I move from liq­uid funds to eq­uity funds, I will at­tract short-term cap­i­tal gain. Is that cor­rect be­cause no one dis­closes that? How does it ben­e­fit after pay­ing tax?

—Mayur Sang­havi Sys­tem­atic trans­fer plan (STP) is typ­i­cally used to sys­tem­at­i­cally de­ploy sums into eq­uity. If you have a lump sum in hand and wish to de­ploy in the mar­ket, you can in­vest them us­ing STP by first de­ploy­ing them in liq­uid funds.

Yes, ev­ery time money is switched out of liq­uid, there will be a small tax (short-term cap­i­tal gain) if the liq­uid fund is un­der growth op­tion. Since it is a liq­uid fund, the gain will not be high.

So, the tax in­ci­dence is not likely to be high ei­ther. More im­por­tantly, hav­ing the money idling or earn­ing a low in­ter­est (also tax­able) in a bank ac­count is a worse op­tion com­pared to pay­ing a small amount of tax by virtue of get­ting (a likely) higher re­turn from liq­uid funds.

Srikanth Meenakshi is co-founder and COO, Fundsin­

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