Q. I will shortly retire from government service. My pension corpus will be about ₹55 lakh and monthly pension is about ₹30,000. I have a family floater plan for ₹5 lakh. My children are undergraduates and wife is unemployed. We have our own house. I am expecting ₹10,000 from monthly rentals. How should I invest my pension benefits so as to attain wealth creation in the long term and get a small amount as monthly interest?
Ajith Damodaran
A. You need to split the corpus between income-generating and wealth-creating products. The amount that goes into each will depend on how much you will require to meet monthly expenses and how much you may need for your children’s further education or weddings.
For income generation, Senior Citizens Savings Scheme, Pradhan Mantri Vaya Vandana Yojana and RBI Floating Rate Bonds offer and lock you into interest rates better than fixed deposits and are very low risk. You can also consider government bonds at this time, as yields are high currently — use the RBI Retail Direct platform to invest in these bonds. However, these have long lock-ins. If you wish to diversify into shorter lock-in products, go for deposits from banks or small finance banks (SFBs). But keep it to ₹5 lakh in each SFB to maximise deposit insurance cover. For wealth creation, the best option is stock market-linked instruments. Low-risk and fixed-income instruments (like bonds and FDs) do not serve up superior returns, are tax-inefficient, and may not always offer compounding benefits. If you are willing to settle for lower returns and aren’t going to be in the tax-paying income bracket, invest in higher-returning FDs or NCDs (cumulative option) from banks, small finance banks and top-rung NBFCs. You can also use the instruments mentioned above and be diligent in reinvesting all interest payouts.
However, if you’re willing to take some risk and do some reading to understand the product, you can invest part of the corpus in simple equity index mutual funds that track the Nifty 50 stock market index. This will give you the returns that the Nifty 50 index delivers — you do not have to do any homework in understanding the fund strategy and suitability, and you do not have to track performance. You can additionally consider debt mutual funds that are more tax-efficient options than fixed deposits and bonds — but make sure to invest only in funds with high-quality portfolios.
Q. I am a 19-year-old student. At the end of my education, in seven years, I want to have grown my money in a smart manner. I want to invest ₹4,000 per month in mutual fund SIPs. I have a medium-to-low risk appetite. I’ve been thinking of index funds like the Nifty 50. I want to diversify across 3-4 funds, as I will not be able to manage more than that. Can you advise me?
Diya Lavina Picardo
A. For ₹4,000 a month, you do not need 3-4 funds – one or two will suffice. Nifty 50 index funds are a good choice. You can invest the entire ₹4,000 there. If you are willing to raise the risk, you can add Nifty Midcap 150 index fund and invest ₹1,000 there. This will offer diversification and the opportunity to earn slightly higher returns over seven years. Be prepared to see ups and downs in these funds. If you want to cut the risk, invest the ₹1,000 in a balanced advantage fund.
Q. I am a 29-year-old professional. My monthly salary is ₹73,000. I have three LIC policies for me, my spouse and a 1-year-old daughter with a premium of ₹33,000 a year. I have SIPs of ₹20,000 a month, in 10 funds. I have an FD of ₹2 lakh and Sukanya Samridhi account for my daughter where I put an average of ₹50,000 a year. I have a long-term financial goal of reaching ₹2 crore within the next 18 years. What are the other investments I should start?
Aadarsh
A. Please note that life insurance needs to be distinct from investments. Therefore, avoid taking on more LIC policies under the guise of investments. If you need to raise insurance cover, go for pure term policies. Continue with the Sukanya Samriddhi scheme as it is a good investment option. Your FD can be set aside to meet any emergencies — you can aim to maintain a balance equal to about six months’ expenses in FDs for emergencies.
If your goal is to build ₹2 crore with SIPs, then ₹20,000 a month is unlikely to meet your target (assuming an annual 12% return).
Therefore, raise the SIP amount as income increases — even small increases can go a long way over the years. Use online step-up SIP calculators to get a better understanding.
In terms of products, your current mix between Sukanya Samriddhi, FDs and mutual funds is good diversification and you do not need to add further. However, without knowing which mutual funds you’re investing in or your risk profile, commenting on whether your overall investments are balanced between risk and return potential will not be possible.
Some general observations are as follows – one, 10 funds for ₹20,000 are too many. Ideally, consolidate to about 5-6 funds. Else, avoid adding any more even if you up the investment amount — of course, with the caveat that they need to be quality funds.
Two, strike a balance between allocating to aggressive mid-cap/small-cap-oriented funds and large-cap-based funds. Your long time frame allows you to allocate to aggressive funds, but avoid going over 25-33% in such funds. Three, if you do not have debt funds, add short-duration, floater or corporate bond funds to reduce equity risk.
(The writer is Co-founder, PrimeInvestor.in)
