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Subbu's Solution

Dear Sir, I need to park a lump sum of 30 lakhs for my retirement benefits for 2-3 years. Please advise whether I should use Bank FDs or Debt MFs or any other means. Please factor in the safety and return and the tax treatment as well as the expense ratio of the MFs while recommending an option.
It’s good to see that you have started planning for your retirement.

Since we do not know your total wealth and how it is split and we also do not know your risk appetite, we will not be able to guide you properly. We also do not know your hurdle rate of returns required to grow your corpus.

We will not advice investing a major chunk in bond funds as it is subject to volatility as interest rates change. This could risk your capital and may also affect your monthly cash flows. But since you have 2-3 year time horizon, you can (after consulting your financial advisor) seek to invest about 20% of your investments in a dynamic bond fund. A dynamic bond fund allows the fund manager to manage the volatility from interest rate changes by altering the portfolio maturity and thus minimizing capital risk.

Assuming you will need regular monthly income, you can invest a substantial chunk in Liquid fund. Liquid funds are less risky and will probably give you interest rates that are available on short term instruments. Liquid funds invest in short term debt instruments.

The other alternative of course is to invest in fixed deposits. They are convenient and can give you regular income. Taxation on the interest would depend on your tax bracket. If you are at the highest tax slab, then interest income from deposits would be charged at 30% and dividends from liquid funds would be charged at 25%. Also, since you have 2-3 yr horizon, if you invest in a growth plan, then long term capital gains on redemptions (after 1 year) would be taxed at 10% without indexation and 20% with indexation, which would be lower than the highest tax bracket.

Disclaimer:

Subbu's Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited. The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. The responses are not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or units of the Mutual Fund. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Please visit - www.QuantumMF.com to read Scheme Specific Risk Factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme's objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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