How long should I invest in SIP to earn decent returns?
– Akshay Chaudhary
SIPs are best for investments in volatile markets. Hold your investments for at least seven years to eliminate risk of capital erosion. Longer the investment horizon, higher the probability of making money.
In the current debt market scenario, is it advisable to invest in arbitrage funds?
—D A Goyal
Arbitrage funds aim to capture the price differential between cash and futures markets. These funds buy securities in the cash/spot market and simultaneously sell them in the futures markets, thereby locking in the price differential between the two markets for the same security. They invest 65-80% in arbitrage oppor-tunities. They are tax advantaged relative to debt funds and are subject to equity taxation as they are taxed at 15% for short-term gains compared with marginal tax rate for debt funds. Long-term gains are taxed at 10% compared to 20%, with indexation for debt funds. Arbitrage funds perform well in volatile markets whereby the price differential between the cash and futures markets is high, thus locking in a higher yield. Credit concerns may not be the primary deterrent to shift to arbitrage funds, as these too invest about 30-35% in fixed income instruments. Instead, you could look at investment in funds maintaining a high credit quality portfolio.
Given the recent changes in valuation norms for debt securities, requiring them to mark-to-market securities with residual maturities more than 30 days in place of 60 days earlier, the returns of liquid funds are expected to taper. Evaluate such funds on a post-tax basis keeping in mind the post-expense yield offered by debt funds.
I do not know much about equity funds. Should I opt for an index fund?
Index funds aim to track a benchmark index with exposure to the exact same securities and with exact weighting. They offer exposure to a diversified basket of securities at low cost, relative to actively managed funds. Index funds having a low tracking error and a low expense ratio are best suited to replicate the performance of the benchmark index. Majority of index funds track large caps. First, judge the suitability of exposure to equity asset class as per your risk profile. Then, invest in index funds only if you have a view that active management may not outperform the benchmark index.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonal firstname.lastname@example.org.