Readers' Corner: Financial planning

Recently, Hawkins Cookers announced high interest rate on their fixed deposit (FD). The returns are far better than what an investor can get in a debt fund or even non-convertible debentures (NCDs). Do you think a company FD with such returns can be a better option than debt funds and NCDs? How do I weigh the risk between the three investment avenues?

Each investment option comes with its own set of positives and negatives. A company is willing to pay you a higher rate of interest if it finds it difficult to raise money at a lower rate. As investors, our problem is generally solved by looking at the rating assigned to the a company’s FD programme by the credit rating agency. The same goes for NCDs. Debt funds are not rated per se, but they invest in a portfolio of securities which are issued by the government, or a government-owned entity, or companies rated by a rating agency, or a combination of the above. Debt funds are also tax efficient. A company with a higher rating has lower chances of default, so you may like to concentrate your money on a company with the highest credit rating, even if the rates offered are slightly lower. 

Alternatively, you could choose the benefits of tax efficiency and diversify your exposure across many fixed interest instruments via debt funds.

My wife wants to open a recurring deposit (RD) for our child. But I am insisting that we invest in a systematic investment plan (SIP) of a mutual fund. Which is  better?

Your suggestion to your wife is absolutely in order, and you must consider an SIP. That is the sure shot way of creating wealth over a period of time. RD may be considered when you are planning for an expenditure that you are likely to incur in the next one to two years. Recurring deposits help in meeting big-ticket expenditures without disturbing your long-term investments and more importantly prevent you from taking unnecessary loans.

I want to create an emergency corpus. Please explain how do I go about it? Can you explain the expenses I need to consider for this and which are the best instruments to use?

Contingency funds depend on your family situation and work profile. A general yardstick would be to provide three to six months of expenditure. This is to tide over an eventuality whereby you do not have a job or do not have a steady professional income. If your family or work situation demands that you provide for one or two years’ provision, then so be it. A great way to manage this is making investments in recurring deposits or SIP in debt funds which are of the liquid or short-term category. 

I have a personal loan, a consumer durable loan, a car loan and a home loan. My bank is offering me a top-up on the home loan at cheap rates. Is it a good idea to repay all the loans by taking a top-up home loan? I will then have a single loan and my equated monthly instalment will also remain the same.

This is a very smart way of paying off expensive loans using another loan available at a reduced or much lower rate of interest. The cheapest loan available in this age and time is the home loan. All other loans are available at a progressively higher rate of interest with credit cards loans being the most expensive. If you land up having a surplus, I would suggest you use that to initiate SIP in an equity mutual fund.

Is it advisable to do a systematic withdrawal plan in an equity fund for cash flow requirement after 10 years?

Absolutely not. If you plan to use this as an income creation methodology and if you are going to be dependent on this, then this could turn out to be a highly risky strategy. If your lifestyle expenditure does not depend on this, then you may consider using this as a profit-booking strategy.

How many equity schemes in a portfolio are good for diversification?

A good portfolio shall comprise of large-cap, mid-cap, small-cap and a few sectoral schemes as well. In each category you may choose to include one to two schemes. Another suggestion is to choose schemes from different asset management companies so that you have different fund management teams managing your money.

The writer is director, Transcend Consulting. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in