Liquid fund: Here is where you could park money

I was having a conversation with a friend who had got some money recently, and wanted to invest that. He was worried about inflation, and did not want to invest into his dental practice.
Liquid fund: Here is where you could park money

Liquid fI was having a conversation with a friend who had got some money recently, and wanted to invest that. He was worried about inflation, and did not want to invest into his dental practice. So here was a dentist with good knowledge about equities and he wanted to invest. I have had this discussion with him in the past, and he is a friend. I am his patient, but he is not my client for anything!

He was getting hurt by the interest rates – he was not happy with the Liquid Fund’s returns. About a year ago, he had moved to Floating Rate Fund, and was happy with that move. However, he was sure that the interest rates will continue to keep going up. So he wanted to shift to a Gilt fund on a Systematic Transfer plan (STP) basis. Remember he had enough equity, so investing in Gilt with a 5% allocation was fine by him.

He said ‘Equities are overvalued’ – he was taking a global view of equities, and I do think he is (was) right. Yes of course, equity is over-valued. However, if you have a big amount – say 20% of your liquid net-worth, you should do a STP or do it as a SIP over an 18-month period.

Let us say your Liquid net-worth is R30 L and you have R6 L to invest, do a STP. However, if you have R1 L, you should put it in an index fund directly.

He wanted to invest in Real Estate. I said with increasing interest rates, people may not want to commit to a long-term loan, so selling RE will be tough. He said ‘yields could improve’. I said I have not seen yields improve – the numerator (rent) is moving much slower than the denominator (RE prices). This makes RE not very attractive – except for people investing their ‘cash’.

So if a person cannot invest in equity markets (over-priced), or debt (yields could improve further), or Real Estate where could a person invest! Good question.

I said ‘pick a fund which is value-based’.

A Value fund has a job to look for good shares – which are reasonably priced, showing some growth, having cash – and paying decent dividends. It is not easy to pick up such shares. I told him this is exactly what I do for myself.

The other option is to do a SIP in a value-fund or you could do a one-time investment in a Balanced Advantage Fund.

I did not suggest any equity share simply because this person is very busy. He has a big clinic with 3 chairs to run. He has some knowledge of equity markets – but I did not want to push him towards that. Why did not say Xyz ultra-short fund or Xyz Balanced Advantage fund? Well, I have not registered as a RIA!

These are real tough times, but I still have enough faith in the equities market, but I do tactically shift to debt. I have invested in the past year in a Floating Rate fund…and a couple of pension plans.

PV subramanyam writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’

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