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I wish to invest lumpsum amounts in ELSS and Monthly Income Plans of mutual funds. I understand that the SIP route is the better option, but since I am 67, I find it difficult to keep track of SIPs. Can I invest lumpsums in ELSS funds (for tax saving) and MIPs for income? If yes, please suggest funds. I am in the 30 per cent tax slab.

Ramanarayanan AR

As you have not stated the specific goals for these investments, we infer that you are considering ELSS (Equity Linked Savings Schemes) for tax savings under section 80C and MIPs (Monthly Income Plans) to earn a regular income. Before taking the decision, please take note of the risks of investing in equity oriented mutual funds.

Equity Linked Savings Schemes invest their entire portfolio in the stock markets. MIPs invest 75-80 per cent of their portfolio in debt instruments and 15-20 per cent in stocks. Therefore, both categories carry risks.

Given that the stock market is currently at a new life-time high and index valuations are at 22 times plus, any investment made at this point in time can suffer a loss if the market falls. In the case of ELSS funds, a market fall can mean a capital loss.

The best performing ELSS with a 10-year record have seen a dip of 50-60 per cent in their NAVs in their worst year. This is why advisors suggest that you take the SIP route to investing in equities. If you phase out your investment over many months, you may suffer milder losses in case the equity market corrects sharply from current levels.

Therefore, while choosing an ELSS, please evaluate if you are willing to risk a loss to your capital, to earn a tax break on your investment. If you have done so and are still keen to go ahead with an ELSS, you should prefer SIPs and plan for a minimum five-year period. The investment is locked in for three years, during which you cannot withdraw any money even for emergency needs.

But that said, funds in the ELSS category have flexibility to invest in large-cap, mid-cap or small-cap stocks. As a conservative investor, it is better for you to choose ELSS that invest in bluechip or large-cap stocks as they may subject you to less volatile returns. Quantum Tax Saving Fund and Franklin India Taxshield are good options here.

Given their 15-20 per cent exposure to equities, MIPs may not suffer an actual loss in a stock market fall. But if the equity market corrects or interest rates rise, MIPs can earn you very low returns. The best performing MIPs in the last 10 years have seen returns fall even to 1-2 per cent in their worst years even as they made 15-16 per cent in their best years. Consider MIPs only if you are comfortable with this variability in returns.

Unlike bank FDs, MIP returns are pegged to the performance of bond and stock markets. When these markets deliver low returns, MIPs can reduce or even skip their dividend payouts. On taxation, MIPs are superior to bank FDs but inferior to equity funds. Dividends distributed by MIPs are subject to a 28.8 per cent dividend distribution tax at source. So, the returns that reach you in the form of dividends on MIPs are reduced to the extent of these taxes. If you are still keen on MIPs, opt for their Growth options, and use a systematic withdrawal plan to set up a regular ‘income’. In this case, you will pay a short-term capital gains tax at your slab rate, on the return component, for the first three years. After three years, the gains get taxed at 20 per cent with indexation benefits.

However, given your needs, you are better off investing in neither ELSS nor MIPs but in the new breed of hybrid schemes that invest in a combination of equities, debt and arbitrage opportunities. These get the tax breaks of equity schemes, but carry lower loss risk due to 60-65 per cent allocation in low-risk investments. They invest 20-30 per cent of their portfolio in equities, 35-45 per cent in arbitrage opportunities (they earn debt-like risk-free returns) and 20-30 per cent in debt instruments. ICICI Pru Balanced Advantage Fund, HDFC Equity Savings Fund and Birla Sun Life Equity Savings fund are good options. Such funds may not be regular dividend payers but you can opt for Growth plans with systematic withdrawal, to set up a regular income.

Send your queries to mf@thehindu.co.in

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