Stick to RD for returns for assured returns in short term

Roongta reasons, "The reason I say so is that the difference between what you will get when you invest into recurring deposit and equity SIP over three years, is very small. We have all seen that the last five years have not been good for the equity markets. If this continues for the next three years, you may land up accumulating nothing. So the risk of investing into midcaps or any large cap in equities will not be worth while. So I recommend that to stick to a bank deposit or a post office recurring deposit."

Below is the edited transcript of Roongta’s interview with CNBC-TV18.

Q: An investor can invest Rs 1,000 per month for three years. He wants to invest in equities and mutual funds. What would you advise him?

A: He wants to invest about Rs 1,000 for three years and wants to accumulate a corporate of Rs 5 lakh for his daughter’s marriage. Instead of looking into equity SIPs for a period of three years, I would recommend to put this Rs 1,000 into a bank recurring deposit or with a recurring deposit with the post office. The reason I say so is that the difference between what you will get when you invest into recurring deposit and equity SIP over three years, is very small.

For example, if you invest in the recurring deposit at 8%, your likely corpus would be about Rs 40,000 after three years. But if you invest the same into an equity SIP over a period of three years and when you assume 12% returns, the corpus accumulated is Rs 43,000. So the different in absolute terms is just Rs 3,000. So I believe that if it’s for his daughter’s marriage and the difference is not that large, he must go in for something, which is more assured in returns.

We have all seen that the last five years have not been good for the equity markets. If this continues for the next three years, he may land up accumulating nothing. So the risk that he is taking by investing into midcaps or any large cap in equities will not be worth its while. So I recommend that to stick to a bank deposit or a post office recurring deposit.

Q: Not even a fixed income or a debt fund?

A: Considering that the amount is just Rs 1,000, the difference between what he would get in the form of a recurring deposit to a debt fund or an income fund, would be negligible.

Though I see that the income funds are poised to give you good returns, the difference in absolute terms will be again Rs 2,000 or Rs 3,000. So rather than wanting to go into something like that, which is variable in nature, it would be better to go for something, which is assured; this way he doesn’t have to bother about monitoring it.

Q: An investor can invest Rs 5,000 per month for 20 years. He wants to accumulate Rs 35 lakh. What’s your advice?

A: Contrary to what we have just advised for the previous caller, I would say that he can comfortably start investing into equity mutual funds. Even if I take a long-term equity average of 14% returns, the corpus that he will accumulate after 20 years is about Rs 64 lakh. That’s the advantage of starting early.

He has got 20 years in hand and if he is starting off now, he tends to accumulate about double of what he is expecting to do so, which is a very nice thing. What he could do right now is that he can split this amount into two parts. Invest Rs 2,500 per month into the Reliance Fund that he already has and the other Rs 2,500 he can allocate towards an index fund which is more of a passively managed fund like Franklin India Index Fund the BSE Sensex Plan.

Also, he doesn’t have insurance of any form. There are two earning members in the family with just the child as a dependent, but you need to understand one thing that you will save this Rs 5,000 a month only if you are alive and you are earning. In case there is some disruption in the income due to death of the earning member, the savings is not going to happen.

The investments will not be accumulating for the corpus of your child. So in that context, if I take just this goal into perspective, he needs to have an insurance of at least Rs 35 lakh, which is earmarked for the education and marriage purposes of his daughter. He should buy more insurance to cover the other income requirements of his family. But at least to begin with, he should secure the corpus that he would want her to have whether he is living or not.