Nitin’s 2-year-old daughter will go to school next year for which she needs to save ₹3 lakhs. He has already decided to do mutual fund SIP to build the fund, but he is still contemplating which category to invest in.
The target here is time-bound and cannot be delayed at any cost, said Paritosh Sharma, co-founder, Pesquare Corporate Advisors LLP, therefore, capital conservation is the main requirement here. Hence it is advisable to invest in the debt category.
Though the returns for debt funds are lower than for equity-linked funds, the capital remains more or less intact.
On the other hand, choosing a debt fund over a fixed deposit gives you tax benefits. For holding debt mutual funds for 3 years or more, the gains are treated as long term capital gains, for which the returns are taxed at 20%. On that the investor gets indexation.
And even under the debt category, it is prudent to invest in short term funds, short term funds, corporate bond funds and banking and PSU funds. He added that these funds invest in high quality paper, so interest rate risk and credit risk are minimal.
These funds give 5 to 6% returns in the current market conditions.
Funds under these categories offer slightly higher returns than overnight or liquid funds but without compromising too much on the safety of the investment.
So, to make ₹3 lakh in a year at 5% to 6% return, Nitin will have to invest ₹24,500 every month for a year.
If the rate of return is 5%, then the total amount on the total investment will be 3,02,085 ₹2,94, 000. Meanwhile, at 6% return, for an investment amount of ₹2,94,000, will increase to become the corpus ₹3,03,732.
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