When it comes to investment in market, most of us first think about safety. Safety of principal amount becomes more crucial if you have a large sum to invest. I must say this in the start of discussion that when we go for safety then we should not expect return more than 7-8% per year, which is very near to standard FD a rate. But the products available in Mutual Funds we can generate alpha over this FD return. We must also need to consider the Liquidity aspect of an investment. This plan is useful for:
- Investment for Emergency Fund creation.
- Funds for Down Payment of Home, Car etc.
- Investments for the proceeds of Redemptions near Goal.
- Retired Person.
What is the plan?
Suppose an investor have Rs5,00,000. He needs this money for down payment for home. This means he can’t take risk on this amount. So what does he has as option for the risk free investments? One of the most common answers would be fixed deposits. But if he finalized any property then it will attract the pre-closure penalty. This will reduce the value of investment. If decision takes longer than inflation will also play its role. This has the same effect on the value of investment.
Now see the option in mutual fund space for this type of investment, where risk should be zero with variable time period. The option is Liquid Funds. it invests primarily in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits. These funds are designed in such a manner that it helps a fund manager in meeting the redemption demand from investors. We can take out our money any time without any exit load. We can get proceeds of redemption in 1 day. Liquid fund can also give instant payment. Sebi has capped this limit to 90% of your folio's value, whichever is lower. CRISIL Liquid Fund Index has given 6.9% return in one year. But you can say that where the alpha is then? Let me explain.
Liquid fund investment (rs500000) with 7% CAGR will give about Rs2900 per month. If an investor invests this amount any large cap equity Mutual fund then it will create an alpha with. If the Equity fund give return 12% per year then the investment would be Rs732795 where as Liquid fund alone will give us only Rs704701. But if we choose fund having better return than difference will be more significant. Nifty has a CAGR of 12.1% in last 20 years (since 1997).
You can download the Excel file for your reference from here.
It was so good to read all these details on no loss mutual funds investment. Most of people think about safety when it comes to investments so this guide is definitely going to attract many. I too got recently interested in equity investments as well. Can you share a guide on what is equity and is it safe?
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