I have Rs 40 lakh to invest as a lump sum. I want to park till I invest in an index fund tracking Nifty 50. Are arbitrage funds good or any debt fund would do?
The entire idea behind doing a Systematic Transfer Plan (STP) - investing in a debt fund while your money is periodically moving to an equity fund - is to eliminate the risk of catching a market high. Assuming that you are going to invest Rs 40 lakh-which is sizable money- in a debt fund and then, you are going to transfer it over the next three years, the difference is not going to be very meaningful in terms of which debt fund you invest in. From that standpoint, whether your residual money, which is periodically being invested in equity, will earn 8 per cent or 7 per cent doesn't make much of a difference. This is because a significant portion of your return will primarily come from the performance of the selected equity fund.
Now, I agree with you regarding spreading this money by investing through an STP so as to reduce the possibility of taking the equity risk at one go. Don't try to rush it and consider spreading it over the next three years.
Regarding selecting a source fund, even arbitrage funds are good. While they can be a little volatile, the scale of volatility may not disappoint you much and will well serve your purpose. But this is not the big decision that you are taking. The major decision is to invest your money in equity and the good part is that you are going to spread this investment over time. So, choosing that time period is more crucial than choosing the source fund. Having said that, I would say that do not complicate the selection process of the source fund. You can go with a high-quality short-duration fund and that should get you modest returns.