For how many years should I invest in SIPs and what kind of funds should I look at?
— Tanmay Sharma

The asset allocation or the mix of various assets including equity, debt, gold, etc held in a portfolio is considered one of the key determinants of its performance. A suitable asset allocation is typically based on one’s investment horizon and risk appetite, or risk-taking willingness. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. Typically, for an investment horizon of up to two years, debt funds are suitable, hybrid fund categories like monthly income plans (or MIPs) can be considered for a horizon of two to three years, balanced funds for a horizon of three to five years, and equity funds for a horizon of five years and above.

The duration and value of SIPs would depend on the targeted corpus value and the investment horizon. Various online goal-based calculators could help you determine the SIP amount based on the expected return on the investment and the targeted corpus value. The tenure of SIPs should typically end at least two to three years prior to the end of one’s investment horizon. For example, for an investment horizon of 10 years, the SIP duration could be seven to eight years. This approach would allow the entire corpus, particularly the investments made through the final 12 to 24 SIPs, to stay invested in the market for a period of two to three years and possibly overcome any interim volatility. Further, as the liquidity requirement for meeting one’s goal approaches, it is prudent to reallocate or shift the corpus gradually from equity to less volatile debt funds/ instruments.

Is there any way I can redeem from ELSS after one year even by paying some penalty?
— Sandip Agarwal

Investments in ELSS are subject to a lock-in of three years. However, in the event of the death of the unit holder, the nominee or legal heir (subject to production of requisite documentary evidence to the satisfaction of the concerned AMC), shall be able to redeem the investment only after the completion of one year, or any time thereafter, from the date of allotment of units to the deceased unit holder.

Like investing in life insurance, do I get tax breaks under Section 80C for investing in any mutual fund schemes?
— Arvind Rao

Yes, there are two categories of mutual funds, namely equity linked savings schemes (or ELSS) and notified retirement funds, that provide tax breaks on investments under Section 80C of the I-T Act, 1961. Investments made up to a total limit of R1,50,000 per annum in these categories is deductible from your gross total income under Section 80C.

Additionally, the Rajiv Gandhi Equity Savings Scheme 2013 (RGESS) can be used for claiming deduction in the computation of total income, in consideration of investment in eligible securities, under sub-section (1) of Section 80CCG of the Income Tax Act, 1961.

The tax deduction in terms of RGESS guidelines will be offered to a ‘new retail investor’ who complies with the conditions of the RGESS and who has a gross total income for the financial year in which the investment made under RGESS is not more than or equal to R12 lakh. The maximum investment allowed for claiming deduction under RGESS is R50,000. The investor will be eligible to get a 50% deduction of the amount invested from the taxable income of that year u/s 80CCG. The benefit is over and above the deduction available u/s 80C. The investment should be made in listed equity shares or listed units of equity oriented mutual funds as stated in RGESS. The investment is locked in for a period of three years from the date of purchase with RGESS. In ELSS, one can invest up to 100% in equities and have a lock-in of three years. Investments in ELSS can be made in lumpsum or SIP mode depending on the investor’s choice. Tax benefits would be available only in the financial year in which the investment is made and only on amount invested in that financial year.

Whereas notified retirement funds invest in a mix of equity & debt instruments in varying proportions ranging from 30% to 100%, in equity and the remainder in debt, during the accumulation or pre-retirement phase and typically up to 40% in equity during the post-retirement or withdrawal phase. Besides tax planning, the other important aspect about investing in these funds that you should consider is your risk appetite, since the underlying investment is in equities (in varying proportion) which tend to generate attractive returns over the long term (three to five years) but can be volatile over the short term.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)
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