Saving scheme for elderly to ULIP vs mutual funds: Experts advise readers

I understand that tax-savings investment should fit the overall portfolio. But could you cite a few examples?

Suppose that you are investing to create a retirement corpus or an education fund for your kids. In the process of doing so, you will have to make a variety of investments. Within this portfolio of investments, assume you are making some mutual fund investments. Within the mutual fund investments, assume you are making some diversified large-cap allocation. In this case, you may consider using an equity-linked tax saving (ELSS) fund as a part of your diversified large-cap mutual fund allocation. Similarly, for some other goal, you may consider using Public Provident Fund (PPF) as a part of your debt allocation in the overall portfolio.

My father is 70, and my mother is 64. They have a family health insurance plan of Rs 5 lakh. I am confused about whether to take a top-up cover for them or use that premium money to create a corpus for their health needs. I can do either. The premiums for Rs 10 lakh top-up for the two of them comes to Rs 60,000-65,000 a year.

It is human psyche that no one wants to lose money for nothing. We all feel so when we are faced with paying insurance premiums, especially when it is unlikely to return anything to us in future. But in the case of health insurance, it is the cost of being alive. It will take a long time to build the Rs 10 lakh corpus you are talking about, not to mention that you might even use it up and not have the health corpus at all when it is required. In my view, it would be wise to pay the top up premium and ensure permanent additional health insurance for your parents.

Do you think the new unit-linked insurance plans (Ulips) are an alternative to mutual funds? They come with tax benefit on investment and withdrawal. Investors can switch funds without paying an exit load or tax, and the fees they charge are low.

Yes, all of that is true. Enormous tax benefits are available in Ulips at the moment. However, there are just a few Ulips which may be considered based on their historical performance. Please understand that most Ulips have hefty charges which eat away your returns over time. The products that do not have any allocation charges would command a high entry ticket in the range of Rs 5 lakh to Rs 10 lakh of premium commitment every year. To summarise, you may consider them if you have a big budget. If you have a smaller budget then look at schemes that have good performance and low allocation charges.

For small investors with a portfolio of Rs 7-8 lakh, does it make sense to invest in international funds focused on the US?

I would instead suggest you explore all the opportunities available in India. You have large blue-chip companies and extremely promising small- and mid-caps as well. An American may want to invest outside America because of fewer local opportunities. In India, however, we are spoilt for choices. The growth story is here right before us, so take full advantage of it.

For long-term debt allocation, is it better to use PPF and voluntary PF (VPF) or debt mutual funds? In case of the latter, which category should investors look at?

This can be done. This will save you from the volatility and uncertainty of bond fund investment. Remember also that there are two problems here - limitations on the amount you can invest in PPF/VPF and liquidity, meaning that the money will not be available for a very long time. This strategy also means that you are technically not interested in creating wealth. In my view, if you have limited resources, you should not consider investing in PPF/VPF but should rather invest your money aggressively in growth-oriented assets. If you have large resources then this strategy is not applicable.

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