I am 68, retired and live with my wife. My two daughters are married. I get Rs 3,000 and Rs 2,000 as pension and annuity respectively. Most of my needs are met by my investments in:
Investments Amounts (Rs lakh)
Stocks 47.0
Mutual Funds 23.3
Fixed Deposits (@ 10%) 11.0
National Savings Scheme 1.2
Post Office SCSS 15.0
Total 97.5
I have medical policies - Rs 2 lakh cover for my wife and Rs 2.9 lakh for myself. Our monthly medical bill comes close to Rs 7,000. Total monthly expense is Rs 40,000. I have emergency fund in a savings bank account.
Goals: I want to sell my residence and shift to a new one. I will need additional Rs 15-18 lakh to be sourced from sale of a part of my stock holding (when the Sensex touches 21,000-level). I may buy another property in Orissa, where I plan to live for some part of a year. I intend to liquidate my remaining stock holdings for the same. I own mutual fund units under dividend-payout option.
A significant part of your investments is in equities, unconventional at your age. However, do not liquidate all equity investments. It will fight inflationary risks on your expenses. Regular income is a priority, so lets address that concern.
SECURING REGULAR INCOME
Invest Rs 30 lakh in Post Office Senior Citizens Savings Scheme (SCSS). Rules permit both you and your wife to invest in two separate accounts, with individual limits of Rs 15 lakh each. Regular interest from this (@ 9 per cent yearly) will provide a recurring income of Rs 22,500 monthly. Add to this your pension and annuity payments and you get a monthly sum of Rs 27,500.
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From here, you have two alternatives:
Option I: After withdrawing money for the new house, move your mutual fund and stock money to balanced funds. Start a monthly systematic withdrawal plan (SWP) from these investments to meet the shortfall and increase it if need be.
Pros: In the long-term, returns from equities are relatively less volatile (see illustration). This will help you leave a meaningful legacy for your daughters.
Cons: A drastic dip in the markets will mean a drop in value of investments.
Option II: To fill the income gap of Rs 12,500, buy annuities from a life insurer. The remaining amount, when put in balanced funds, will provide extra pay.
Pros: Annuities ensure life-long flow of income, without uncertainties or breaks. High entry age, here, means higher annuity per lakh, per year.
Cons: You will not get the purchase price in your life. The table below shows annuity options under an annuity plan of a public sector insurer.
FUNDING NEW HOME
You are well off with a total investment of Rs 97.50 lakh, no outstanding liability. You may not delay your new house. Reason: investment of Rs 40 lakh at 10 per cent per year will give Rs 21,150 monthly, for 22 years, increasing at 6.5 per cent to counter increasing cost of living. You will gain from the rising market as you will not exit equities.
REBUILDING MF PORTFOLIO
Current Mutual Fund Holdings:
GUIDING PRINCIPLES
The rules below will rebuild your portfolio, ensure discipline with returns.
* simplicity
* tax efficiency
* fighting inflation
* stable returns
Balanced fund, which invests 65 per cent in equities and remaining in debt, will ensure high stability than a pure equity funds. Long-term capital gains tax will be not be applicable if you withdraw after one year of investing.
As you will not use this money in one go, the risk of equities will be moderated. Following illustration based on a fund performance explains how.
ILLUSTRATION
Year: 2000
Fund: Tata Balanced
Investment: Rs 50 lakh
Monthly Withdrawal: Rs 12,500
Inflation: 6.50 per cent
DSPBR Balanced, Tata Balanced, HDFC Prudence, Reliance Regular Savings Balanced and FT India Balanced are few funds with a proven track record. You may invest in two to four funds.
STOCK INVESTMENTS
Managing a four to five fund portfolio is easier than a stock portfolio. Move your stock investments to mutual funds, to get the required diversification.
ENSURING TAX EFFICIENCY
Balanced fund withdrawals will be tax-free, but, interest from SCSS, pension, etc will be taxed. If taxable income exceeds Rs 2.4 lakh, avail Section 80C benefits by moving money from equity funds to tax-saving fund.