While investing in a debt fund, try to match your investment horizon with the duration of the fund
30-Sep-2015 •Research Desk
I discovered your website in 2010 and after getting the basic concepts right I started investing in mutual funds systematically (through the STP route) in some of your four- and five-star-rated diversified equity funds. It has been quite rewarding, with around average 20 per cent annual return. However, I am due for retirement in 2020 and would want to allocate some investments to debt funds too for appropriate balance in my portfolio. Should I also invest in debt funds through the STP route (instead of a lump sum), especially for income funds, where there could be short-term fluctuations in NAV.
- Dibyendu Basu
SIP or STP is a preferred method to invest in equity schemes because it imparts discipline and averages the cost of purchase over a period of time. Also, regular investments can rule out the possibility of committing all the money during a market peak. However, these things don't apply to debt schemes as they are not that volatile or risky. In short, it is perfectly okay to invest a lump sum in a liquid scheme.
While investing in a debt fund, try to match your investment horizon with the duration of the fund. This will ensure that you are picking up funds that match your investment objective. For example, use liquid funds to park money for a few weeks or months. Use liquid-plus schemes for parking money up to a year.
You can keep half of your contingency fund in a fixed deposit and invest the other half in a liquid fund. If you don't have a pension, you can keep the money needed for the first three years in a short-term fund. Invest the money you don't need for three years in a liquid scheme.
Since you are going to retire in 2020, you should revisit your equity holdings. This is because we recommend investors to move their money from equity to safer avenues like bank deposits, debt schemes at least three years before the actual event. This is to ensure that any upheaval in the market doesn't upset their plans. Keep the money in equity only if you don't need it at least for the next five to seven years.