Mutual Funds

Fund Query: How you can accumulate ₹12 lakh through mutual fund SIPs in 5 years

Parvatha Vardhini CBL Research Bureau | Updated on April 10, 2021

I am a regular reader of BusinessLine and I find your recommendations in the Sunday edition very useful. I would like to invest ₹10,000 every month through SIP in mutual funds over the next five years — my goal is to accumulate ₹12 lakh to renovate my existing house. I have planned to invest ₹5,000 in a Nifty Index Fund and ₹5,000 in Parag Flexi Cap Fund. Kindly give your recommendation regarding the funds. I am open to changing my plan based on your recommendation.

ManiIn general, accumulating for goals such as renovating an existing house or for down payment for a new house using the mutual fund route is a good idea. In your case, though, there are a few points to take note of.

Firstly, at any point in time, a period of five years is not a very comfortable time frame for your equity fund investments to go through market ups and downs and deliver good returns. Yes, it is not short. But it is not long enough, either. This is especially true in today’s circumstance where we are perched on a market high. If any correction sets in from here on, one cannot say with certainty as to how long it will last and how much time it may take to recoup. This means your investments, begun at this point in time, could dwindle first before they recover and deliver. You must decide if you have the appetite for this rough ride.

Today, five-year SIP returns on most large-cap index funds stand at 14-16 per cent. The best of flexi-cap funds sport a SIP return of 15-20 per cent over the last five years. But there is no assurance that you will get the same return over the next five years. Assuming a conservative 10 per cent return in your case for the next five years, a SIP of ₹10,000 a month for the next 60 months (five years) will deliver only ₹7.74 lakh. If you need ₹12 lakh, you will have to step up the SIP amount to ₹15,500, at the same 10 per cent return.

Of course, the returns may be higher or lower than the assumed 10 per cent, but the message here is that if you can stretch your goal of renovating your house by a few more years, if you have alternate or additional sources of savings to tap, you will be more comfortable.

If you wish to play safe, you can use fixed income instruments such as recurring deposits if you are particular about saving a certain sum every month. We are at a low in interest rates now and hence, don’t lock into long-term RDs. Choose an RD for six months or a year and move the maturity sum into a short-term fixed deposit later on. You can repeat this process over the next few years, choosing the instrument and the tenure based on the interest rates offered, as well as the time available to meet your goal.

As per the new PF rules, interest on cumulative annual employee contributions above ₹2.5 lakh shall attract income tax at the applicable tax slab, wherever employer is also contributing. Since the EPFO invests in the stock market through NIFTY ETFs, would you advise readers hitherto investing over ₹2.5 lakh in PF to look at NIFTY ETFs in SIP mode, as an alternative for excess amounts? In such a case, please suggest some well-performing ETFs.

Santosh SinhaThe attractiveness of the VPF no doubt dims with the imposition of tax on interest earned on contribution above a certain threshold. However, returns on the VPF may continue to be attractive when compared to the interest rates being offered on other debt instruments. This is because the interest rate on EPF/VPF is not exactly market-linked and is fixed every year by the government. Thus, on a post-tax basis too, the VPF may not lose sheen when compared to other fixed income options where the interest is taxable.

However, if these things change in future and you wish to redeploy what you hitherto invested in VPF, the redeployment should be based on your overall asset allocation strategy to various asset classes such as equity, debt and gold. If you have enough exposure to equities as per your asset allocation plan you can redeploy from the VPF to the PPF. The PPF offers tax-free interest and is also as risk-free as the VPF. You can consider passive funds based on the bellwether indices if you do not already have enough exposure to equity as per your asset allocation plan. You can go for index funds rather than ETFs. With index funds, you can do SIPs and don’t require a demat account. You also don’t have to worry much about other issues such as tracking error and liquidity associated with ETFs. HDFC Index Sensex and UTI Nifty Index are decent choices.

Published on April 10, 2021

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