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Investment Strategies for lumpsum/one-time investments to generate higher, tax efficient returns

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Pawan Agrawal

When it comes to lumpsum investments, bank deposits have been a preferred choice for investors of all age groups. Bank Deposits offer fix rate of interest for a defined time period and are considered safe. However, due to taxation and negative real returns (Interest earned over and above the inflation rate), these deposits don’t help in creating positive wealth for the investors. In fact, in long run, fixed deposits can seriously lower the purchasing power of the investments.

For investors, we list down three investment strategies that can be used for lumpsum investments to gain higher (real) returns and to save on taxation in comparison to bank deposits.

Invest in Short/Medium Term Debt Mutual Funds

Debt mutual funds invest money in securities like Bank CDs/Corporate deposits/Money Market instruments. These securities offer fixed rate of return to debt mutual funds and are rated by SEBI authorised credit rating agencies like CRISIL, ICRA etc. Debt funds make investment in these securities in bulk, hence they get higher rate of interest than the rate that an individual may get directly from a bank or company. Debt funds also trade these securities frequently in the market to make extra returns. This enables a debt fund to deliver a higher rate of return to the investors in comparison to a bank deposit, and that too with reasonable safety to the invested capital.

Current taxation laws also allow indexation benefits to investment in debt funds after three years of investment, thus lowering the tax significantly on the earned income. An example to demonstrate the benefit of indexation in debt funds is given below.

* Tax on bank deposit interest assumed @ 30%, tax on long term capital gains in debt funds is 20%

Investing in debt funds could be a useful strategy for investors looking to invest lumpsum money for safety of capital and consistent returns for short and medium term financial goals.

View Recommended Debt Funds

Invest in Balanced Funds through Systematic Transfer Plan (STP)

There are several instances when investors have spare, lumpsum money, may be due to gains from business or job, maturity value received from past investments like NSCs, life insurance policies or bank deposits or small savings which have accumulated over a period of time. These investors don’t see any immediate need of this money in near future and wish to invest it for returns higher than that of fixed deposits or debt funds.

A Systematic Transfer Plan(STP) is another investment strategy that an investor can choose to make these lumpsum investments. In this plan, the lumpsum amount is first invested in aliquid/ultra short term debt fund. The gains made from this fund or a fixed amount is transferred to a balanced fund on a weekly/monthly basis. The liquid fund provides safety and regular returns to the lumpsum amount whereas a periodical investment in balanced fund provides higher returns over medium to long term, thus overall increasing the returns with low/negligible volatility on the capital invested.

Investors who wish to invest lumpsum amounts for medium to long term to earn10--12% returns without taking too much risk should consider investing through STP mode.

View Recommended Ultra Short Term Debt Funds

View Recommended Balanced Funds

Invest in Conservative Balanced Funds

Balanced Funds generally invest 65-70% money in equity and 30-35% money in debt securities. These funds generate attractive returns (14-16%) over medium to long term and are considered less volatile than pure equity funds.

However, in balanced fund category, there are couple of funds that have a unique mandate of changing their equity proportion from as low as 30% (when the market valuations are high) to a maximum of 80% (when the market valuations are low). Another unique feature of these funds is daily/monthly rebalancing of Equity:Debt ratio depending upon the market movement. The flexibility and regularity of these balanced funds to alter the Equity:Debt ratio makes them even less volatile than regular balanced funds, while keeping their potential intact to generate attractive returns over medium to long term.

Investors who don’t mind taking some risk to generate attractive, tax free returns should consider investing their lumpsum money in these conservative balanced funds. With very low volatility, an investor can expect 13-15% returns from these investments.

Conclusion

Individuals willing to invest spare, lumpsum money should first identify the investment period for which they wish to invest this money and the returns they expect from their investments. For individuals who don’t wish to take any risk and are happy with post tax returns of 6.5-8.5% should continue investing in fixed deposits. Investors who are looking for higher post tax returns on their lumpsum investments should consider the above investment strategies to create positive real returns to meet their future financial goals.

Do talk to your financial advisor to understand the above strategies in detail and to know the suitability as per your investment needs.

Happy Investing!

Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at pawan@investguru.in .

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Sankha Mukherjee says

11/21/2017 2:08:00 PM

I hv around 3 lacs which I want to invest for 5 years. Please suggest where to invest. One of friend is asking to invest in PNB SMART Platinum.



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