I started investing in mutual funds five years ago. Over time, I made several changes in my portfolio, guided solely by neighbourhood advisors. However, except for a 25 per cent gain made in the first two years, I am going nowhere. How can I go about setting things right? I am 60 and retired, my risk appetite is low-medium, and I need an income of Rs 40,000 per month to retain my current lifestyle. I want future improvements in income to be in line with the (real) increase in cost of living that a middle class couple living in a metropolitan city.
I have Rs 9 lakh in my savings account, received recently from the government as compensation for acquired property. Of this, Rs 7 lakh is subject to long-term capital gains (LTCG), which I would like to invest. My children are well settled. I and my wife have adequate insurance.
If you look at the Retirement Portfolio Principles, you would realise you have gone against many. The most obvious ones are having invested in too many funds and keeping a higher allocation to aggressive or thematic funds. Here is what you can do:
CLEAR THE CLUTTER
Over 50 per cent of your current MF portfolio is in thematic and aggressive funds. Their performance is driven by movements in their underlying themes and market-cap ranges (small- and mid-cap stocks), making your portfolio risky. We recommend you opt for a balanced fund. It invests a minimum of 65 per cent of its assets in equities, and the rest in fixed income securities. This will decrease the riskiness of the portfolio and give it stability.
Divide your MF investments among three or four balanced funds. You may consider HDFC Prudence, Canara Robeco Balance, DSPBR Balanced and Magnum Balanced.
REBALANCE RECURRENTLY
The portfolio must get rebalanced regularly every year, so that the ratio between debt and equity investments always remains at 80:20. In your case, keep 30 per cent of your corpus in balanced funds and 70 per cent in debt.
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FD VS SCSS
Senior Citizens Savings Scheme (SCSS) is a Post Office savings scheme having a maturity of five years, with an interest of 9 per cent. When your banks’ fixed deposits (FD) mature, check whether the interest being given there is less than in SCSS. If so, you can consider shifting the FD proceeds to the latter.
CONTINGENCY CASH
Keep about Rs 5 lakh in flexi-fixed deposits and keep about Rs 50,000 in your savings account to meet any emergencies that may crop up. Also, get a health cover for your wife and you.
ESCALATING EXPENSES
Due to inflation, expenses will increase, but interest income from debt investments will not. To compensate, you can withdraw parts of your investment in the balanced funds as and when required. For your benefit, we have calculated how you could have kept ahead of inflation, had you retired 10 years before.
DODGING INFLATION
Required Income: Rs 4.8 lakh per year
Income from fixed return instruments: Rs 4.2 lakh per year (Rs 35,000 pm)
Balanced funds investment: Rs 14.5 lakh
Making up shortfall: Considering an inflation rate of 4 per cent, the required income per year would increase to Rs 4.99 lakh in the first year itself. Hence, any shortfall in income should be met by withdrawing from balanced funds.
| WITHDRAWAL AMOUNTS |
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Amount
Calculated based on DSPBR Balanced Fund’s return from June 01, 1999 to June 01, 2009.
INCOME TAX
Money received from FDs and Post Office MIS are added to the investor’s income and taxed as per the applicable tax slab. Hence, while calculating tax, if any part of your income is taxable, then you might consider investing up to Rs 1 lakh in either SCSS or a tax-saving fund.
LTCG ON PROPERTY
Long-term capital gains from property are taxed at the rate of 20 per cent. Hence, for Rs 7 lakh gain from the property you will have to pay Rs 1.40 lakh as tax. You can invest the gains in notified capitals gain bonds to get a tax exemption.
Both National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) have such bonds for a maturity of 3 years and they pay 6.25 per cent and 5.75 per cent, respectively. The interest income from these bonds are taxable as per your tax slab.
You may consider paying the tax and then investing the remaining in equity funds. At the end of three years, you would end up with Rs 7.45 lakh compared (at 10 per cent) to Rs 8.42 lakh from capital gains bonds (assuming interest is invested in FDs at 8 per cent). Though this might not seem very attractive, if you stay put with your investment in equity funds, then the returns from this avenue will be far higher and tax-efficient.