Q. I am a 60 year old housewife. I have a LIC policy of ₹5 lakh which will be maturing at the end of this year. Can you suggest good investment plans that can give me ₹10,000 per month without risk?
Kamal Dake
We regret to tell you that your return expectations are very unrealistic. Today, the safe fixed income options in the market such as government bonds, deposits with leading banks and government-backed small savings schemes pay out interest of about 5.5-7.5% per annum (pa). But for an investment of ₹5 lakh to fetch ₹10,000 per month, the effective return would have to be about 24% pa Even if you were to look for instruments that offer half this return, you’d be putting your capital to considerable risk in today’s interest rate environment.
Given your age and life stage, we would suggest that you prioritise capital safety over returns and invest this lumpsum in government-backed schemes, even if it means settling for lower returns. The monthly income schemes that offer relatively high returns with such government backing are the Post Office Senior Citizens Savings Scheme (SCSS), Post Office Monthly Income Account and LIC’s Pradhan Mantri Vaya Vandana Yojana. The SCSS is a deposit scheme that you can invest in via India Post or leading banks. It’s a five-year scheme which offers quarterly interest. The interest is changed by the government at the beginning of every quarter but the current rate (valid for deposits upto March 31 2022) is 7.4 per cent per annum. The Pradhan Mantri Vaya Vandana Yojana is a scheme from LIC where you make an upfront payment and receive monthly pension at the rate of 7.4% p.a. To get a pension of ₹9,250 per month from this scheme you need to make an upfront payment of almost ₹15 lakh. This scheme carries a 10 year lock in period. The Post Office Monthly Income Account pays you monthly income against an upfront deposit of up to ₹4.5 lakh. The scheme carries a 5-year lock in period and currently offers an interest rate of 6.6 % p.a.
Q I am a 18-year-old student. I have started SIPs in smallcap funds from Axis, ICICI Pru and Kotak with monthly contributions of ₹700. I also invested ₹500 in Quant ELSS Fund. Is this the right track? What else I can do to improve my investing strategy?
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Tanmay Adhikari
It is admirable that you are thinking of saving and investing at such a young age. ButYou need to take a more planned and systematic approach to investing, so that your investments help you meet your goals without subjecting you to undue risks. Before you choose funds to invest in or start SIPs, it will be good to put some thought into why you’d like to invest in the first place. The target sum you’d like to save up, the time horizon over which you’re hoping to get to this target and the risks you’re willing to take along the way - all will have a bearing on which instruments you choose and the kind of products you decide to invest in. This earlier article we published has details on how you can go about taking a planned approach to your investment journey.
Having said this, we have three comments on your fund choices currently. One, small-cap equity funds today have the highest past returns but you should be aware that such funds, because they invest in the less established, emerging companies in the listed universe, usually carry very high risks. While small-cap funds, if run well, can deliver very high returns beating all other categories of funds in bull markets, they can also lose money equally fast during a correction or in a bear market. Therefore, you should invest in small-cap funds only if you will not panic or lose sleep over a 40-50% drop in your investment value in a corrective phase. While small-cap funds do have high wealth creation potential especially for young investors like you, such potential works in your favour only if you can hold on for a really long period (say 7-10 years) and will not exit your investments midway, either because you need the money or are hit by losses or poor returns. If you don’t have such a risk appetite, index funds that invest in broader markets like Nifty 500 funds or BSE 500 funds or a combination of a Nifty50 and Nifty Next50 fund would be a better bet for SIPs.
Two, it is never a good idea to invest all your savings in a single fund category or even in an asset class. As a beginner, we’d typically advice you to split your money between safe investments (like the PPF) and risky investments like equity MFs. Even within equity MFs, you should ideally invest in a multicap/flexicap fund or diversify across large, mid and small-cap funds rather than concentrate your SIP money in three small-cap funds.
Three, ELSS funds are usually meant for individuals who earn a taxable income and would like to avail of the ₹1.5 lakh a year tax exemption under section 80C. As a student, there’s no specific reason why you should prefer an ELSS fund over a plain vanilla multicap or flexicap fund. While there’s no harm in investing in an ELSS fund even without looking for tax breaks, you need to be aware that ELSS funds carry a 3-year lock in period for each of your SIP instalments, whereas open end flexicap/multicap funds do not have any such lock-in requirements.
