We discuss how to plan for financial goals 5-10 years away. They are neither long-term to include equity nor short-term to avoid equity completely.
Financial goal planning is all about setting the right priorities. If my need is within five years, it would be prudent to avoid all equity. Equity returns are volatile regardless of investment duration. If I have, at best, five years to play with, then I may not have the time to allow markets to recover if I start with a string of bad returns. Or, if I am not careful, I could lose all earlier gains in a crash in the last year or two. So equity is best avoided.
Some people argue, “Then how do I beat inflation?”. Inflation is negative compounding. It needs time to work its dark magic. Typically, not much is going to happen in five years or less. So, one could easily combat inflation for short-term goals by choosing a safety-focused conservative portfolio and investing the appropriate sum.
For long-term goals – which we would like to define as ten years and beyond – a good chunk of equity is necessary, but not more than 50% to 60%, depending on the risk appreciation of the investor.
The situation with intermediate-term goals (greater than 5Y but less than 10Y) is tricky. Even expert investors are better off without any equity exposure for short-term goals. Even novice investors cannot say ‘no’ to equity for long term goals. For intermediate goals, however, the strategy would largely depend on the investor’s experience.
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New investors: They are better off with fixed deposits and recurring deposits. Yes, this is not tax efficient, but at least there would be some guarantee that they would get close to the desired target corpus.
Suggesting debt funds would be tricky for them. Liquid funds, money market funds or arbitrage funds (debt-like in risk but taxed as equity). The risk is reasonably low in these but so would the reward over 5-10 years and they may or may not beat an FD/RD depending on market conditions. Any other choice would be volatile and a newbie may not be able to stomach it.
Investors with a little more experience and can stomach some market risk (with no guarantees) can consider a fund like Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund.
Experienced investors can consider a fund like Parag Parikh Conservative Hybrid Fund or equity savings funds (please check the equity holding history of these fund before investing as they can, in principle, hold up to 50% which is excessive for intermediate term goals).
Other hybrid categories such as Balanced Hybrid Funds or balanced advantage funds or dynamic asset allocation funds are risky for this duration.
What about Income Plus Arbitrage Fund of Funds? These are hybrid fund of funds investing in debt-oriented funds (< 65%) and arbitrage funds to ensure the returns over 24 months are taxed at 12.5% and not as per the slab like pure debt funds.
This requires some experience, and I will not recommend it to newbie debt fund investors. Even older investors should tread with caution, look at the credit quality of the bonds, and ensure the duration is not too long (average maturity 5-6 years or so) for 10-year goals. The debt funds in this category vary quite a bit, as do the risks. We do not recommend this category. Never choose a product only to save on tax!
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