Have some additional funds that you want to invest?!
Often, many of us do not follow the goal-setting method and instead work with surplus funds. What should I do in such cases?
Even in this scenario, the important question to ask yourself is: how long will I have this surplus to invest regularly, and how long can I stay invested? The timeframe is critical as it helps determine the investment avenue. Each avenue comes with unique characteristics of risk, reward, liquidity, and suitability based on the timeframe. Therefore, matching the investment avenue with the goal’s tenure is the crucial first step in deciding where to invest.
For instance, you cannot invest an emergency fund in stocks. Consider this: liquidity and capital protection are crucial for emergency funds. While stocks offer liquidity due to their broad market, their prices are volatile, making it risky to liquidate at any time, potentially leading to capital loss.
Investing is both a science and a planning process. One must understand the basics and devise an investment plan to optimize the benefits.
Consider another example to emphasize the importance of awareness when investing: suppose you have Rs. 5,000 to invest monthly over the next 3 years. You start a SIP (Systematic Investment Plan) in an Equity Mutual Fund and withdraw the amount at the end of 3 years. Here, you are invested for a tenure that may not be optimal for equity funds (which are typically advised for investments held for >5 years). Additionally, the last 12 SIP instalments may attract Short Term Capital Gains (STCG). Hence, it’s crucial to consider all advantages from different angles.
In this example, you can:
- Stop the SIP after the desired period.
- Hold according to the chosen fund’s recommendation (e.g., equity for 5-7 years at least).
- Utilize tax rules to your advantage. Investments in equity for more than 12 months qualify as Long Term Capital Gains (LTCG), taxed at a reduced rate of 12.5%. Furthermore, the first 1.25 lakh rupees of gain are exempt from tax, ensuring you pay tax only on profits beyond this threshold.
PS: Each SIP instalment is considered individually for its holding period for tax calculations upon exit.
In another example, consider that you have received a lump sum—whether as a gift, bonus, maturity proceeds of a previous investment, or as a business owner with occasional lump-sum receipts—and you are looking to strategically optimize the returns from these funds.
Lump-sum investments in mutual funds are advisable when the market, company, or sector you are targeting presents a favourable opportunity, such as during a market correction. Otherwise, a Systematic Investment Plan (SIP) is typically a better route. In other cases, you might choose to stagger your lump-sum investment over 3-4 instalments to benefit from market fluctuations and average the cost of your investments. Stay invested long enough to make the best of the tax advantages as applicable to your investments as also to benefit from the tenure you stay invested based on which type of fund you are investing in.
Grow your knowledge. Apply what you’ve learned and become a smart investor, reaping the benefits.
