Got a lump-sum to invest? Don’t take a blind plunge into falling markets

The market fall may tempt many into taking the dive into equities. But emotions need to be kept at bay while taking financial decisions. However, if you base your investment decision on your financial goals and use a suitable asset allocation pattern, you have a better chance of your money working for you.

Saving for large purchases

 If you have plans of making a big-ticket purchase – a house, luxury car – or taking a family vacation overseas in the next three years, ignore all that noise around you. It is time to be conservative with your money. Given the short time-frame on hand, you should not be taking risk.

For goals that are less than three years away, keep a chunk of your assets in fixed income. When you have a short-term view, preserving the capital gets precedence over returns. You should invest in a mix of ultra-short and short duration funds. If you want to further be conservative, then you can also look at banking and PSU bond funds. A large chunk of your scheme’s assets should be in AAA and equivalent securities.

Though gilt funds invest in government securities and have delivered double-digit returns over the past one year, they are best avoided since you do not have a long-term view, and as there are interest rate risks.

If you fall in the lower income tax brackets, you can consider investing in bank fixed deposits and small-saving schemes as well. “Tax-free and other good-quality bonds maturing in thr next two or three years can be bought from the secondary market,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

Long term capital gains (bonds held for more than three years) are taxed at 20 per cent, after indexation. Otherwise the gains are added to the income and taxed at the slab rate.

Investing for the medium term

These goals can be 4-7 years away, perhaps even 10 years away. If you cannot stomach volatility, stick to fixed income options. “Corporate bond funds are attractive investment options along with banking and PSU bond funds,” says Jitendra Solanki, a SEBI registered investment advisor. Fixed income should be the dominating component of your portfolio.

“If you want to invest for more than five years, then consider some exposure to equity funds after taking into account your risk appetite,” says Suresh.  Allocation to equity mutual funds brings in the return kicker. Invest in index and multi-cap equity funds in a staggered manner over the next 3-6 months. As you move closer to your financial goals, do not forget to switch from equity to bonds. Typically a year or two before your financial goal, opt for systematic transfer plan from equity mutual funds to liquid schemes.

Investing for the long haul

If you are keen to invest for the really long term, say, for your retirement due 15 years from now, then look at equity mutual funds. Use a mix of index and active funds. Invest in equities using the systematic transfer plan route. If you are comfortable investing in equities, then allocate up to 10 per cent  of your money to international funds in a staggered manner to benefit from geographical diversification. For international equity exposure consider index funds focused on US markets over thematic funds.

“Long-term investors with the stomach for high volatility should consider some allocation to mid-cap funds,” says Amol Joshi, founder of Plan Rupee Investment Services. But don’t go overboard.

Finally, as Moneycontrol has always suggested, keep 5-10 percent of your portfolio in gold. When equities fall and economies do poorly, gold acts a hedge. “Use sovereign gold bonds to take exposure to gold,” says Jitendra.

Avoid sector and theme funds if you are investing in equites for the first time. If liquidity isn’t important for you, PPF is a good avenue.

Investing for a regular income

If you are a senior citizen and want regular income, a falling interest rate environment is challenging. But if you are comfortable locking in your money, then you can invest in the senior citizen saving scheme or Pradhan Mantri Vaya Vandana Yojana.

Irrespective of your financial goals and the time frame for which you are investing, do not ignore your emergency fund. At least an amount equal to six months of your expenses should be in safe bank fixed deposits or liquid funds. If you expect a job loss or salary cut, increase the size of the emergency fund.