I am 59 years old and wish to retire in February 2010. I want to create a pension fund and also seek regular tax-free returns from mutual funds. I own a house and don't have any liabilities.
- H Rao Yadavalli
Your retirement is round the corner. You have not left much time for maneuvering your investments. So, priority must be given to sourcing a regular income for you, backed up by safeguarding your capital.
REGULAR INCOME
You can invest in Senior Citizen Savings Scheme (SCSS). The investment limit for this is Rs 15 lakh and it will give you an interest of 9 per cent per annum. While the remaining amount (Rs 2.92 lakh) can be kept in fixed deposits (FDs). Your annual interest from SCSS will be Rs 1.35 lakh, which will translate into a monthly income of Rs 11,250.
The investments under SCSS will fetch you a tax deduction under 80C, but the interest income will be taxed in your applicable slab. If you do not have any other source of income, the total income will be tax-free. That is because, for senior citizens, total income up to Rs 2.40 lakh a year is tax-exempt from this year onwards.
| Top 10 MF Holdings | |
| Fund | Allocation (%) |
| DSPBR T.I.G.E.R. | 8.48 |
| Fidelity Equity | 6.53 |
| IDFC Classic Equity Plan A | 4.01 |
| Reliance Equity | 3.89 |
| Sundaram BNP P Fin. Ser. Opp. | 3.37 |
| Magnum Contra | 3.09 |
| ICICI Pru Focused Equity | 2.78 |
| Tata Equity Opportunities | 2.75 |
| BSL India GenNext | 2.41 |
| Fidelity India Spl Situations | 2.24 |
| Data as on Nov 30, 2009 | |
| Top 10 Equity Holdings | |
| Stocks | Allocation (%) |
| ICICI Bank | 9.58 |
| BHEL | 8.36 |
| Glaxosmithkline Pharma | 7.58 |
| Reliance Industries | 6.63 |
| Sterlite Technologies | 6.21 |
| Infosys Technologies | 4.28 |
| Colgate-Palmolive (I) | 3.12 |
| IndusInd Bank | 2.62 |
| Punjab National Bank | 2.08 |
| Wipro | 1.93 |
| Data as on Nov 30, 2009 | |
TAX FREE, BUT…
If you want a totally tax-free income, then invest in equity, as it provides exactly that – after a year, equity dividends and capital gains are both tax-free. But returns from equity are highly volatile and high on risk. You may not be able to get regular income and capital safety, which is very important for you.
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The other option is that you retain your Rs 6.50 lakh in FDs and also the investment of Rs 11.42 lakh in equities and mutual funds. You may withdraw a maximum of Rs 1.8 lakh annually from your FD investments – it will provide a monthly income of Rs 15,000 to meet your most essential or necessary expenses. However, you must replenish your FDs, in one or two years. This money can be sourced from gains that would be booked from your equity investments.
PORTFOLIO OBSERVATIONS
Clutter: Diversification is good but too much of it will only add to unnecessary paperwork and management issues. Currently, you are invested in 17 funds. Having seven to eight funds will provide you more than enough diversification.
New fund investments: You have also invested in four funds that do not have a track record. This is risky and should be. Always invest in funds with a performance record that can be tracked.
Thematic funds: An investor can have a small exposure to thematic funds and it's good to see you have restricted that up to 10 per cent of your portfolio. That, too, in infrastructure , a broad theme compared to other sector funds. But you have exposure to three funds in this space (Reliance Infrastructure, DSPBR T.I.G.E.R. and SBI Infrastructure Fund Series-I). This is unnecessary. If you want to take exposure to a single theme, one should be sufficient.
Closed-end fund investment: You have invested in one closed-end fund, SBI Infrastructure Fund Series-I. These funds generally have a high exit load on redemptions made before maturity.
Lumpsum Investments: You have made lumpsum investments in mutual funds. That is akin to timing the markets. Always spread your investments. Investments through systematic investments plans (SIPs) are ideal. It gives you benefit of rupee cost averaging.
Stock Situation: You have invested directly in stocks and they account for around half your combined investment in stocks and mutual funds. One should invest in stocks directly only if one has the time and expertise to review investments.
Unhinged Allocations: Since you have invested in a large number of funds and also in stocks separately, your portfolio is exposed to 287 stocks. Of these, your top 15 holdings account for 60 per cent of your portfolio, while the rest have less than 1 per cent exposure each.
Emergency Fund: You should also make an allocation to emergency funds to meet unforeseen expenditure requirements. You should also get health insurance.