Are liquid funds a substitute for the money kept in savings accounts or in fixed deposits? Are they risky? What return could one expect?
When it comes to tax efficiency, debt funds score over traditional investment avenues. Given the increased investor education around the advantages of liquid funds, individual investors are increasingly exploring liquid funds as a substitute for savings funds. According to the Sebi classification, liquid funds are low on risk and the average return for this category over the past year has been 6.55 per cent, making it an attractive combination for risk-averse investors.
If one invests in an equity linked saving scheme (ELSS) via a systematic investment (SIP), how will the three-year lock-in be calculated? Will one be able to withdraw all the money at one go or have to withdraw each installment at different times? Would you recommend an SIP in ELSS funds or a lump sum?
The lock-in period is on prospective basis, that is, starting from the date of investment for the next three years. All units which have completed three years may be redeemed whenever required. Since ELSS investments are largely made with an aim to benefit from tax saving, it is advisable to make staggered investments to benefit from the concept of SIP. However, if market valuations are reasonable, one can consider lump sum investment. This is not the case right now.
My agent is asking me to invest in balanced funds. I have read that they have become popular. How do they function?
Balanced funds offer the dual advantage of investing in two asset classes, debt and equity, at one go. This category of funds has emerged a winner over the past two years in terms of investor interest, largely on account of better investment experience.
Balanced funds help manage volatility well. Such funds allow one to invest in equity or debt according to the relative attractiveness of asset class, based on pre-determined market indicators, such as price to earnings (PE), price to book (PB) ratio, etc. So, when equities are attractive, fund allocation increases towards equity to tap into the opportunities available. For example, if the PB ratio of an index like the Nifty were to head north, above a certain level, the fund manager would book profits from its equity portfolio and increase exposure to debt. On the other hand, if equities were to correct and on a PB basis the market turns attractive again, the fund would increase its exposure to equities and reduce the debt component.
Are there risks in a diversified equity fund holding a lot of cash? Up to what level is okay?
The cash component in an equity fund is three to five per cent to meet liquidity/redemption requests. Mutual funds are long-term investments and do not take huge cash calls. However, some funds have a mandate to keep cash. In most cases, cash is held in the form of debt, if the mandate allows it take some debt exposure.
The writer is Executive Director, ICICI Prudential Mutual Fund . The views expressed are the expert’s own. Send your queries to email@example.com