From liquid funds to equities: Use systematic transfer plan to move funds

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Updated: March 26, 2019 1:09:52 AM

In an STP, your money earns higher returns in the liquid fund relative to your bank account, and is then invested into the fund based on the STP schedule.

Consult your financial advisor for an appropriate fund which suits your risk profile.

I want to park Rs 2 lakh in a liquid fund and then go for systematic transfer plan to invest in equities. Is it a good idea?
– Prakash Kumar
Yes, this is advisable. In an STP, your money earns higher returns in the liquid fund relative to your bank account, and is then invested into the fund based on the STP schedule. Be circumspect while selecting a liquid fund and avoid those taking extra credit risk by investing more than 20-30% of the AUM in AA and below rated papers, particularly in the current fixed income market environment.

– How can I invest in stocks abroad through mutual funds in India? What would be the tax implication?
—Jitender Pant
You can invest in Indian funds investing abroad (U.S., Asia, Europe) for eg., ICICI Prudential US Bluechip, Edelweiss ASEAN Equity Offshore Fund (F-o-F), Franklin India Feeder – Franklin U.S. Opportunities Fund., etc. Investing in foreign equity through Indian mutual funds attracts 20% tax with indexation. If held for more than three years, the cost price is indexed to reflect the cost price in today’s terms and only the gain is taxed. Consult your financial advisor for an appropriate fund which suits your risk profile.

– Is it better to invest in index funds as the stock markets are very volatile?
—GS Sindhu
Equity index funds invest in stocks by replicating a benchmark equity index such as the S&P BSE Sensex, Nifty, etc. They buy all the stocks which are in the benchmark index in the same proportion or weight. The objective is to provide a passive exposure to the index without taking any active calls in terms of either stock exposures or weightages. This strategy varies from an actively managed equity fund wherein a fund manager actively manages the portfolio by buying or selling stocks which might vary from those held in the index. Index funds are also subject to equity market related volatility which may be higher or lower than that of an actively managed fund. This would depend on the strategy adopted by the fund manager, number of stocks in the portfolio among other factors, vis-à-vis the index. Since index funds are passively managed, the expense ratio tends to be lower than that of actively managed funds.

-The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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