I wish to start a ₹75,000-SIP for one year and hold it for five years thereafter. My risk profile is moderately aggressive. I wish to allocate the funds into large-cap, mid-cap, small-cap ,flexi-cap or sector funds (such as EV stocks). Will this strategy work out ?  If not, please guide me.

Sanjay

It is not clear how much corpus you need for the goal you are saving for and whether the five-year timeline is flexible. It is also not clear why you want to do SIP of ₹ 75,000 a month for only one year and let the investments float for five years. In the absence of specific information, here is a general observation about your strategy and suggestion on the way forward.

First of all, today we are at a time when a convincing rally in the markets post the March 2020 Covid slump has given way to volatility. Concerns on inflation and global growth slowdown pose downside risk to the markets at this point. While a five-year time period is not too short for market investments made now to overcome any sharp fall and still deliver, it is still not long enough for comfort. Usually, SIP investments work well when done continuously through market ups and downs, over several years of your work life, for the purpose of building a corpus towards long-term goals. If you can save ₹9 lakh (75,000 *12) in a year starting now and your timeline is flexible, you can consider splitting the ₹ 9 lakh into a few instalments and investing as a lump-sum, whenever there is a market correction over the next one-year period. Given that you have a moderate-to-aggressive risk appetite, you need not go for pure large-cap funds. Large and mid-cap funds such as Canara Robeco Emerging Equities and DSP Equity Opportunities , flexi-cap funds such as Kotak Flexicap and focused funds such as Axis Focused 25 are good choices. You can also consider index funds in the mid-cap space, considering that passive funds in this category have been outperforming actively managed funds. Lump-sum investments definitely suit sector funds better than SIPs, as these funds require timing the entry (when the sector is in vogue) and exit (when the sector loses popularity). Per se for the EV (electric vehicle) theme, there is no dedicated fund as yet, although there is an existing actively managed fund — UTI Transportation and Logistics — focusing predominantly on the auto sector. Besides, a couple of ETFs based on the Nifty Auto Index were launched recently. However, if EV is your focus area, following a bottom-up strategy and investing directly in stocks that have an edge over peers as far as the EV shift is concerned, can be a more rewarding experience.

I would like to park some emergency funds in liquid funds. In which fund can I invest?

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Fund Query: Which are the debt funds where I can park my emergency corpus?

S Subramanyan

Holding emergency funds equivalent to at least six-nine months’ expenses is a good idea. Sweep deposits — where money from your savings bank account above a certain threshold is automatically moved into a fixed deposit — is a safe option to park funds for emergency needs. When you require the money and the balance in your SB A/C is not enough, an automatic reverse sweep into your SB A/C will help you access the savings immediately. With mutual funds, you may have to wait for a few days for the redemption proceeds to be credited to your bank account. Yes, liquid funds allow instant redemption facility. However, you can redeem only up to ₹50,000 or up to 90 per cent of the investment amount instantly per day per scheme.

On the returns front, sweep deposits offer returns equivalent to fixed deposits of the same tenure. Some banks allow you to choose the tenure of the sweep deposits, others don’t. Across public and private sector banks, deposit interest rates now range from 4.25 to 6.25 per cent across tenures. These rates are higher than what most SB A/Cs offer.

Debt funds that invest in shorter-tenure instruments make sense now, considering that interest rates in the economy are expected to move up sooner than later. On maturity of the papers they hold, these funds can reinvest at better rates. Liquid funds show an average return of 3.36 per cent in the last year. On paper, returns can be better from now. However, given that they invest mostly in very low-risk instruments, returns may be lower than other shorter-tenor fund categories such as short and low-duration funds. These two categories have given 4-5 per cent returns in the last year. But it may take two-three days for redeeming from these funds in case of emergencies. Even short-tenure FDs of small finance banks can make the cut if you are willing to wait for two-three days.

Your choice should be based on how instantly you want access to the savings, whether you prefer locking into a rate for safety and peace of mind or would like to take some amount of risk for getting market-linked returns.

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