READER’S CORNER
I am 42 and have two debt fund schemes. I can invest ~25,000 a month for the rest of my life. I want to build wealth. Should I invest in an active or passive equity fund? The suitability of an active or passive equity fund depends on your risk appetite. An active fund usually carries some amount of additional risk as investment decisions are taken by a fund manager. In contrast, a passive fund invests in stocks in the same proportion as the underlying index with a tracking error signifying the difference in returns. To get the best of both the strategies, splitting your monthly investments between passive and active funds.
Keep in mind your age and asset allocation mix as you grow older. At 42, you are capable of taking higher equity exposure. However, as you grow older, consider switching to less risky investments, such as hybrid funds that allocate between equity and debt, and even gold (in some hybrid schemes). Closer to retirement or post-retirement, invest in safer debt-oriented mutual funds.
I am 40. I want to save ~20 lakh in the next five years. I also want to save income tax. Can I use multi-caps for both these goals?
Since you have an investment horizon of five years for a goal of ~20 lakh, multi-caps could be a good choice as they invest across market caps. They aim to create a balance between large-cap stocks, which are relatively more stable, and mid- and small-cap stocks, which tend to generate higher returns over the long term. Being equity funds, returns from multicap funds are tax efficient.
However, to save taxes, consider investing in an equity-linked saving scheme. They invest in equities and also enjoy tax deduction under Section 80C up to ~1.5 lakh. They can help build wealth over a long period. ELSS has a lock-in period of three years.
I am 32, and I want to have international exposure in my portfolio. How can I do that?
It is advisable to invest in the international market once you have enough investments in the domestic market to capture its growth potential. Assuming you have enough investments in domestic funds, you can take international exposure either by investing in a fund that invests directly in international equities, or a feeder fund that invests in funds in other countries or markets. Some feeder funds or fund-of-funds could invest in one or more geographies.
The advantage of investing in the international market is that it gives a broader exposure to the investor in regions they might otherwise not have any exposure to. However, investors need to be aware that these funds run currency risk. They invest in an international currency even though investors invest in them in their local currency.
I want to go to the US to study. I can save ~50,000 a month. Which scheme should I invest in?
Assuming your plan to study in the US is a near-term goal (that is within three years or less), you could consider investing in debt schemes. Near-term or short-term goals
should be ideally met by investing in debt funds, as these funds aim to protect capital. Equity funds tend to be comparatively risky in the short-term and are, therefore, not recommended for goals that have to be realised in the short run. However, you must note that withdrawals from debt schemes in the shortterm (three years or less) attract short-term capital gains tax. This tax is calculated based on your income-tax slab. In case you can invest for more than three years, go for hybrid funds or large-cap funds.