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Ranbir: Yay! I got a Diwali bonus of 10 Lakhs and I’m wondering where to invest it. I already have a lot of money in Fixed Deposits and Post Office schemes.

Alia: Have you thought of investing in Mutual funds?

Ranbir : Yes, I’ve been considering it for a while now, but I hold back on hearing things like a Global Recession is coming soon. I often read that India’s economy is slowing down as well. Investing in Mutual funds is risky.

I’m looking for safety of capital and liquidity: My money should be available whenever I want it.

Alia: I have a strategy that I’ve used over the years which can work for you. Your 10 Lakhs investment will be secure and easily accessible.

Invest the money in a liquid fund, which will give you annual returns of around 6.5 to 7%. Only invest the interest income earned in Equity Mutual Funds every month.

On 1st Jan 2007, I invested 10 Lakhs in a liquid fund. On average, I earned a little over 6,000/- every month from this which I invested in an Equity Mutual Fund. Sticking to this approach over the years; I have invested 9.6 Lakhs in the Equity Mutual Fund. It is currently valued at 22.3 Lakhs! I invested 10 Lakhs, I have 32.3 Lakhs today (10 in liquid and 22.3 in equity) so I got 9.56% returns.

All this, even after the 2008 financial crisis and various major and minor economic slowdowns have occurred since 2007. Because I invested for the long term, the cyclical ups and downs were taken care of.

And the cherry on the cake is my initial investment of 10 lakhs was in a liquid fund all the time.

I can redeem regardless of market highs or lows. Liquid funds are simply debt mutual funds that invest your money in financials papers which hold the least amount of risk like government securities. They are almost as good as savings accounts but offer significantly higher returns. The pre-tax returns are comparable to Fixed Deposits but can be higher post-tax depending on your tax slab.

The beauty of Alia’s strategy is that she has earned the 9.56% risk free as her money has been in a liquid fund the whole time. Only the returns on her investments did she reinvest in Equity.

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