All this is fine. But how do I put all this into action?
Before we jump into the action plan, let’s decide on the the scenarios under which we plan to use debt funds.
I personally use it under 2 scenarios:
- Relatively short time frame + Goal is extremely critical (i.e cannot be postponed eg education fees, marriage etc) and no back up funding plan if there is a shortfall + Safety of money is priority i.e no losses whatsoever
- Part of asset allocation
Taking into account the above scenarios, let us put in place a simple investment framework for our short term investments (less than 5 years)
- 1 day to 6 months – Liquid Funds
- Eg Axis Liquid Fund, Kotak Liquid
- 6 months to 2 years – Ultra Short Term Funds
- Eg IDFC Ultra Short Term Fund, Reliance Money Manager Fund
- >2 years – Short term funds
- Eg – Axis Short Term, IDFC SSIF – Short Term Plan
- Avoid credit risk: No credit funds
- Minimize interest rate risk:
- No Income funds (funds with high modified duration)
- No Dynamic funds (funds which adjust their modified duration to take advantage of interest rate movement)
The basic idea is to keep my debt fund portion,
- As simple and basic as possible
- Minimize risk to a large extent
- Spend minimal time and effort in tracking
All risks and the chase for returns will happen in my equity portionwhere I also intend to focus majority of my time and efforts.
So given the context, we have put in place a reasonably good frameworkfor short term investments.
But then Albert Einstein suddenly reminds us..
Now, the next step is to play the devil’s advocate and question
- Arbitrage funds don’t get taxed post 1 year. Aren’t they better than debt funds on a post-tax basis for investments more than 1 year?
- Can’t we use some portion of equities for non-critical goals in the 3-5 year range to improve returns?
Honestly, I don’t have immediate answers. So in the coming weeks, we shall find out the answers to both these questions and see if we can improve upon our existing framework.
Till then happy investing
Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.