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| Young investor at cross-roads, confused which type of mutual fund to choose. |
Actual Question:
Which
Category of Mutual Funds Should be Invested lumpsum when Market Is At High
Level; Debt Funds or Liquid Funds?
Answer:
Dear Friend!
A very good question
indeed! Thank you.
If a person is talking
of mutual funds, it generally means that person does not the time or knowledge
or interest in making own in vestments. For the person who makes self
investments in stock will find a few good stocks available at attractive
valuations even when the market is high. I bought ‘six
stocks’ yesterday when the BSE Sensex reclaimed 30000!
Therefore, if agree that
the individual is considering mutual funds as she or he does not the time or
knowledge or interest in making self investments, then it does not matter
whether the market is at a high or low. Such individuals must invest at all
times in stocks through ‘dollar
cost averaging’.
Now let us examine which
type funds to invest. Before we delve into details, kindly understand that each
category of fund is designed for an exact and specific purpose and one can not
consider the funds loosely.
Debt Fund:
A debt fund is meant for
an individual or organisation which has a huge corpus or lump sum and requires regular
income for the running or maintenance. For example universities like the
Harvard and Oxford are endowed with huge donations by successful alumni and
other philanthropic person. The universities also have huge running costs.
Therefore they should invest in debt funds or any other regular income generating
source.
Similarly, suppose an
individual inherits a billion dollars in cash, he or she should invest the
corpus in funds that give regular income. Another example for an individual
with a large corpus is a retired employee. Suppose on retirement the employee
got a large corpus as retirement benefits (provident fund, gratuity and so on)
and the retiree requires a regular income, then the corpus should be invested
in a debt fund.
Therefore a small lump sum in a different situation is not suitable for debt fund.
Liquid Fund:
A liquid fund is
designed for corporations and other business organisations who come into
possession of a huge sum temporarily and the money is required to be deployed
for other purposes soon, and in the interim the organisation does not want the
money to lie idle but earn some income.
Let us assume that a
company has raised a b billion dollars by issuing shares to the public. Let us
also assume that the object of the share sale is setting up a mega steel mill
with a captive power plant. It is going to take many years for the project to
be commissioned. What will the company do with the billion dollars? For this
situation the liquid fund is designed. The fund generates some regular income
and also offers the flexibility (since it is liquid) to redeem any portion
depending on the company’s needs.
Equity Growth Fund
Debt and liquid funds
are not meant for young or early middle-aged persons who are building their
careers and have to build wealth and retirement solutions, having scope for a
long, active-income generating capacity. ‘Equity Growth Fund’ is the
only option for them.
I once again thank you
for raising this important question and I hope I was able to clear your doubt regarding which mutual fund to choose to invest a lump sum when the market is high.
With Best Regards
Anand