Liquid fund returns can decline with lower interest rates


I have been keeping money in bank recurring deposits (RDs) for my short-term goals. Are liquid funds a good option for such goals?

—Chetan Singh

Liquid funds are a good option to park your surplus money temporarily instead of allowing them to lie in your savings bank account as they typically deliver higher returns than the saving bank interest rate. If you wish to have liquidity (that is, easy access to your money) then it is a good option. However, liquid fund returns too can decline with lower interest rates. Hence, they may not always deliver high returns. If you want a substitute for an RD with a two-year perspective, you can consider short-term debt funds such as UTI Short Term fund. You can check Mint’s curated list of 50 mutual fund schemes and choose liquid funds to invest in ( ). These funds are likely to deliver higher returns than RDs and you can always take your money out whenever you need, as there is no lock-in.

Also, if you hold short-term debt funds for over three years, it will be more tax efficient as they will have the benefit of capital gain indexation.

I m 28 years old, single, and earn around Rs.70,000 a month. My monthly expenses come to Rs.25,000. I do not have exposure to mutual funds (MFs). What kind of MFs should I invest in to a retirement corpus?

—Kamlesh Pathak

You are a young, single person who is saving more than 60% of your income as of today. It is good that you are thinking of saving for a long-term goal such as retirement at such a young age, and it is great that you have a substantial portion of your income at your disposal for such an investment.

However, you should realise that your life would change when you marry and along with it your savings potential. Hence, you would do well to create a retirement portfolio in a sustainable manner using a lesser portion of your saving than you can afford to as of now. I would recommend that you use about 20% of your earnings—Rs.15,000—for your retirement portfolio on a monthly basis.

As for funds, you can invest in an aggressive portfolio that is heavily equity-oriented. You have indicated that you are a first-time investor in mutual funds. You have to realise that MF investments are volatile and their value can go up and down over short periods of time.

Every time your portfolio sees a dip, you should remember that this is a retirement portfolio and that you would not need the money for several more years. To start with you can invest Rs.3,000 each in four funds—ICICI Prudential Focused Blue chip, Mirae Asset India Opportunities, HDFC Mid Cap opportunities, and BNP Paribas Mid cap. The remaining Rs.3,000 can be invested in a short-term debt fund such as Franklin India Short-term fund. Make sure you review your portfolio annually for performance and quality.


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