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Should I invest in post office RD account? Answers to your personal finance queries

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Q. I have been investing in equity since 2001 by directly buying stocks and via the mutual fund route. My return never touches the 12%-mark and is only around 8-9%. In 2016, I sold all my stocks and invested in Portfolio Management Services (PMS) of a reputed firm. Initially, I was happy with the profit but in the last one year, the performance has not been up to the mark and my capital has seen an erosion. Kindly advise whether I can continue in PMS or if I must withdraw the funds and invest on my own.

RAVI

A. You have been investing in equities long enough to expect good returns. However, from what you say, the stocks or funds chosen by you did not deliver quite well. It is also possible that you were either churning your portfolio often or tried timing the markets. These factors may also have hurt compounding. From 2001, any lump sum or SIP investment in top quartile equity funds would have delivered double-digit returns.

Coming to your question on PMS, it is not surprising that your PMS portfolio did not perform well in the past one year. Most equity products have been struggling to deliver and if you had been in high-risk themes such as mid or small-cap portfolios, then there is a good chance that your portfolio would have seen erosion. It is hard to comment on whether the PMS product you are with is a bad one, merely based on this performance.

Please be aware that many PMS products deliver very well in a rally and manage poorly in downfalls. Talk to the PMS agent/representative to know what went wrong and what their strategy is to recover. Give it 2-3 quarters and if performance further slips (compared with the market), then consider moving out and invest the same in an asset-allocated combination of multi-cap, mid cap and debt funds, using the systematic transfer plan (STP) route. Do not try to choose just top performers. Look for funds that have shown consistency over the years.

Q. I am 20 years old. I have been investing in post office RD account at ₹1,000 per month. Now, I have ₹60,000 in hand and am thinking of investing further. I want some suggestions on where to invest the money to get good returns with no risk. Please suggest the best option.

Minato L. Mehta

A. Risk and returns are highly correlated. You can take higher risks and earn more or lose more. You can take lower risks and earn less and lose less or lose nothing. Since you do not wish to take risk, you have chosen the right option in government schemes like post office RD. You can also consider bank deposits and quality corporate deposits like HDFC, Sundaram Finance or Bajaj Finance.

Having said this, if you do not have any need for the money in the next few years, given your age, you should consider some exposure to equity through mutual funds. If you start with market-linked products like mutual funds early on, you will have enough time to allow the market to work in your favour. Your risk capability is higher when you are young, if you do not need the money in the short term.

Q. My parents are around 60 years of age. They recently sold some land and got about ₹1.25 crore which they want to invest and get regular income. Please advise how and where to invest and in which type of fund. Also, how should we identify a certified financial adviser?

Mithun Jain

A. If either of your parents have crossed 60, then he or she can invest ₹15 lakh in Post Office Senior Citizens’ scheme and government’s pension scheme through LIC’s Pradhan Mantri Vaya Vandhana Yojana. Both these have among the best interest rates among fixed return products. This should provide them some steady income.

Another ₹20-30 lakh can be invested in fixed deposit options in large public or private banks and corporate deposits such as HDFC, Sundaram Finance or Bajaj Finance. If there is further need for income, they can consider investing in liquid and ultra-short-term debt funds and do a systematic withdrawal plan (which is automated) for a fixed sum every month.

Once they set aside the capital needed for their regular income, a small portion can be allocated for emergency medical needs. The rest can be invested in combination of equity funds and low-risk debt funds to allow their corpus to grow and withdraw them when they need it in later years or pass it as legacy.

An adviser will help assess their requirement and risk and accordingly decide whether they can handle some equity exposure. You can visit the web site https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=13 to find a registered investment adviser (RIA) in the city you live in. Understand the fee and state the requirement clearly so that your need is well met.

Q. I am a 23-year-old female working in the corporate sector. After adjusting my expenses, I can invest ₹25,000 every month. I am thinking of investing in ELSS as it will save on my tax as well as give me high returns. FDs have very low interest rates and do not interest me. Please suggest how I should go about investing my money.

Leena

A. Given your age, it is a good idea to invest in tax-saving funds (ELSS) instead of tax-saving deposits. As you rightly observed, bank deposits not only yield lower returns, but the interest is also taxable.

Hence, the returns post tax are not great. ELSS enjoys deduction of up to ₹1,50,000 along with other tax-saving options. Consider your EPF, insurance or any other deductions and then invest in ELSS for the remaining amount. You need not invest in ELSS beyond this, since you do not get any added tax benefit.

There are similar MF products without Section 80C deduction but that can deliver good returns.

After meeting your Section 80C investments, consider investing about 60% in open-ended multi-cap equity funds and about 40% in corporate bond funds.

This is assuming you have at least a five-year time frame. Else, reduce your equity allocation and increase investments in corporate bond funds.

Q. I am a student currently preparing for law entrance examinations. Every month I save ₹5,000-₹10,000 from my allowance. I feel I should channelise this amount, though trivial, into good investments. Please suggest some options, if any.

Srishti Rathore

A. The amount you are saving is not trivial at all. ₹10,000 per month saved for, say, the next 3 years can leave you with ₹4-₹4.5 lakh if you build a portfolio with some equity.

Assuming you have a 3-5-year period at least, consider about 50% of your investment in a multi-cap equity fund and another 50% in a short-term debt fund with low credit risk. If you need any money for the near term, simply park them in liquid funds or invest in FDs that allow you to break without any penalty.

Q. I am 24 and I intend to take a break of two years beginning next financial year. My total income is ₹8,11,000. After deducting ₹25,000 (education loan interest at 12% for 5 months), ₹60,000 (rent), ₹1,50,000 (ELSS SIP), and ₹10,000 (savings account), my taxable income is ₹5,66,000. Should I prepay the education loan from a tax and savings perspective?

I will be paying another ₹35,000 as interest for the remaining financial year. If I don’t prepay, I can claim deduction on interest. There are no penalties on prepaying. How should I invest the ₹66,000 above ₹5 lakh for efficient tax management?

I have additional uninvested savings of ₹5.5 lakh which I intend to invest. I need liquidity of ₹2.5 lakh p.a. for the next three years. Please advise.

Ayush

A. There are two parts to your question. One, on managing taxes for the current year and second, how to invest your savings and meet your liquidity needs for the next 2-3 years.

On the first question, we do not know when you took your education loan as the deduction is available for only up to 8 years. Also note that the deduction is only against ‘taxable income.’ We are not sure if you have other sources of taxable income from next year.

If such income will be available during your break, then you can continue to claim the education loan deduction under Section 80E.

Else, claim the deduction for the current fiscal and then prepay it immediately thereafter, if you have enough surplus.

On your savings of ₹5.5 lakh, again, if you are dependent on this saving for the next 2-3 years, then calibrate your expenses and ensure you manage within the savings.

Given that you need liquidity, you must consider only a combination of quality corporate deposits and liquid funds and ultra-short-term debt funds. You can do a systematic withdrawal plan from these funds in an automated manner to meet your monthly expense requirements.

(The author is Founding Partner — PrimeInvestor.in, a unit of Redwood Research)


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Printable version | Nov 30, 2021 1:15:37 PM | https://www.thehindu.com/business/should-i-invest-in-post-office-rd-account-answers-to-your-personal-finance-queries/article29865642.ece

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