Reader's corner: Mutual Funds

Topics Mutual Funds | readers corner | PPF

I am 42. Out of the Rs 1.5 lakh limit under Section 80C, my home loan and Employee Provident Fund combined get me around Rs 1.2 lakh deduction. For the remaining Rs 30,000, should I go for equity-linked savings scheme (ELSS), Public Provident Fund (PPF) or National Pension Scheme (NPS)?
NPS, definitely not. Ordinarily people derive a lot of comfort from investing into PPF, and rightly so. It is a good investment and one of the few guaranteed types of investments. However, ELSS creates a lot of wealth over a long period of time and personally I wish that ELSS had a section of its own in the Income Tax Act. Due to this incentive, people would invest a significant portion of their savings here. Returns from ELSS are not guaranteed, but what is certain is that over a long period of 10 years it will make maximum wealth for you. Although the lock-in period in ELSS is just three years, if you are considering investing in it, stay invested for many, many years.

When advisors make a financial plan, what is the range of inflation they consider? I was calculating education and medical inflation and realised that both have been at an average of over 10 per cent. How much inflation should individuals with children consider when saving for a goal?
I would like to consider a five-year average of inflation based on the consumer price index. Over long periods of time, financial plans should also incorporate changing levels of inflation. Therefore, it is a good idea to keep reviewing your financial planning annually. You may want to add 1-2 percentage points to be conservative, and to add a cushion to your calculations.

If I look at the current scenario, there are no gains in equity or debt. Most of the predictions are that things will get worse. The one single factor that supports growth – government policies – seems to be falling short. I have never seen such a market in the last two decades. I am tempted to stop my systematic investment plans (SIPs) in equity funds and opt for fixed deposits (FDs) of small banks that offer better interest rates. Are there other safer options like FDs that can give me 8 per cent return?
These days we are all so performance driven that we want continuous performance at any cost and at all times. Every investment market is driven by its nuances. Most retail investors only chase performance, they do not ride performance. They see historical performance and then decide to do a fund SIP, or invest in the stock markets. But if they don’t see quick returns, they stop the investment and once again come back after a large part of the next rally or performance cycle has already happened. My suggestion is that you continue your SIP and continue to accumulate units. Remember you were doing this for a 10-20-year period and to multiply your money. If you choose to simply grow your money marginally, then FDs should be your vehicle. Other similar vehicles could be corporate FD and PPF.

What are your thoughts on peer-to-peer lending as an investment product? Many platforms talk about giving over 12 per cent returns. I do understand that there would be defaults and returns can get hampered.
That’s true, there will definitely be defaults. But that is the risk you are taking to earn a higher return. Having said that, also understand that most of the people applying for a loan on these platforms will generally be finding it very difficult to get loans through the regular banking channel. The saving grace is that Indians generally are quite honest people and honour commitments well. The ticket size is also reasonably small, so you may experiment.  
The writer is director, Transcend Consulting




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