Parking nine-month money when the equity fund looks tempting
Ms. Iyer, 41, has ₹12,00,000 maturing from a fixed deposit and needs ₹11,50,000 in nine months for the balance payment on a flat. She is in the 30% tax slab, has never bought a mutual fund, and wants the money safe, but is tempted by a large-cap equity fund that returned 22% last year. Her advisor lays out four routes: a large-cap equity fund with a 1% exit load within 12 months; an equity arbitrage fund; a liquid fund holding only AAA paper and treasury bills; or a nine-month bank fixed deposit at 6.8%. Separately she wants to start a ₹10,000 monthly SIP in the large-cap fund for retirement. She asks which product to use for the nine-month money, whether a Friday 4:30 pm cheque purchase or a Friday 2:00 pm UPI purchase will get Friday's NAV, and whether the SIP makes the equity fund safe for the flat money.
1. Recommend a product for the nine-month money, using the loss budget, exit load and tax treatment to justify rejecting the equity options.
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Start from the loss budget. She needs ₹11.5 lakh from ₹12 lakh, so she can absorb at most ₹50,000, or about 4.2%, of loss. Any product that can fall more than that in nine months is disqualified regardless of its past return.
- Large-cap equity fund: a 15-20% drawdown over nine months is entirely normal, which is three to four times her loss budget. On top of that, redemption within 12 months attracts a 1% exit load (about ₹12,000), and gains on units bought on or after 23 July 2024 are short-term capital gains taxed at 20%. Last year's 22% is not a forecast.
- Arbitrage fund: taxed as equity, but the return is modest and not guaranteed; the 1% exit load and short-term tax further erode a thin spread. It reduces risk, it does not remove the timing risk of a fixed date.
- Liquid fund: graded exit load applies only for the first seven days and is nil afterwards; it holds paper of up to 91 days, so interest-rate and credit risk are small if it stays in AAA and T-bills. But after 1 April 2023, gains on debt funds are taxed at the income-tax slab, exactly like FD interest, so there is no tax edge over the deposit.
- Bank FD at 6.8%: interest taxed at slab, return known on day one.
Judgement: liquid fund or FD. The choice is operational, not tax-driven.
2. She invests on a Friday. Explain which NAV applies to a 2:00 pm UPI purchase and to a 4:30 pm cheque purchase, and why.
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Rule: for a purchase, the applicable NAV is the NAV of the business day on which the request is received before the 3:00 pm cut-off and the funds are realised. For liquid funds the same-day treatment specifically requires realisation of funds before 3:00 pm.
- Friday 2:00 pm by UPI: the request is before cut-off and UPI realisation is immediate, so she gets Friday's NAV (provided Friday is a business day; if it is a holiday, the next business day's NAV).
- Friday 4:30 pm by cheque: the request is after cut-off and the cheque is not realised that day, so she gets the next business day's NAV, typically Monday's. The purchase is late on both counts.
Practical points: the cheque must be from her own bank account and her KYC must be complete; the NAV she gets is not negotiable after the fact. For a purchase made close to a public holiday, a UPI purchase before 3:00 pm on the last business day is the only way to lock that day's NAV. She should also confirm that Friday is not a bank holiday, because fund NAVs are not declared on non-business days.
3. She believes the ₹10,000 monthly SIP in the large-cap fund will make the equity fund safe for the flat money because it averages the cost. Correct her and explain how the two pots should be handled.
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The SIP does not protect a dated liability. A SIP averages the purchase price across instalments; it does not create a floor under the value on the day she must withdraw. If she starts a SIP in the large-cap fund in parallel and the market falls 15% just before the flat payment, the SIP folio is worth less than she put in, and she cannot wait for a recovery. Averaging works with time; her liability is fixed in nine months.
What the SIP is good for. Retirement is a long-horizon goal with no fixed withdrawal date, so a monthly SIP in an equity fund is a reasonable vehicle for it. Keep the two pots physically separate, in separate folios, and never treat one as a fallback for the other.
Two facts she should know about the SIP: each instalment has its own holding period for long-term treatment (12 months for equity funds), and long-term gains above ₹1.25 lakh in a financial year are taxed at 12.5%, with short-term gains at 20%. Also compare the direct plan of the same fund with the regular plan, since the commission difference compounds over a long SIP.