My aunt, 62, is seeking advice on her investments in mutual funds. She plans to trim her portfolio to absolutely minimise her exposure to equities. She wants to redeem her unworthy funds and invest in instruments which will give her monthly returns. Please suggest some good monthly income plans (MIPs) and other investments where she can get monthly or quarterly returns. She has an existing investment of Rs 9 lakh in Post Office MIS and Rs 5 lakh in a bank fixed deposit.
-RK Bansal
Your aunt seems to have begun investing in mutual funds at a rather advanced age. Investing Rs 10.30 lakh in 21 different, largely equity, funds does not augur well for any portfolio.
We needed more information for analysis. In the absence of it, we are proceeding on the assumption that your aunt has no other investment, that she has no outstanding liabilities, such as servicing a loan or taking care of a financial dependant. And, that she primarily requires from her portfolio a regular income, as you have stated.
Your aunt’s portfolio shows a greater tilt towards fixed-income instruments: she has invested Rs 5 lakh in a fixed deposit and Rs 9 lakh in the Post Office monthly income scheme (POMIS), amounting to a total of Rs 14 lakh. The overall debt-equity ratio of her portfolio works out to 58:42.
You aunt has missed out on the advantage of investing in scheme that offers a higher guaranteed return, the Senior Citizen Savings Scheme (SCSS).
SCSS is a fixed-income product that offers nine per cent return annually, compounded quarterly. It matures after five years and can be extended by another three years. It, however, comes with a couple of riders: an individual cannot invest more than Rs 15 lakh in it and the investor needs to be at least 60 years old at the time of investment. Your aunt can look at the option of transferring her investments in POMIS or fixed deposit to SCSS when the former mature.
Consolidate
Investing Rs 7.8 lakh across 21 fund schemes amounts to excessive diversification. The time frame of investment also indicates she did not invest in these funds using a systematic investment plan, the optimal way of investing in equity funds. It is for this reason that her investment of Rs 7.8 lakh has grown to just Rs 10.30 lakh over a five-year period.
It is imperative that she consolidates her fund holdings. Below, we have suggested two portfolio options: either she stays away from equity mutual funds completely or she should take only a few calculated risks.
If your aunt prefers the conservative portfolio, then she should invest all her holdings in four monthly income plans (MIPs) of mutual funds. These schemes invest just 20 per cent of their corpus in equities. Though they do not guarantee returns, they do make frequent payouts, which will help your aunt meet her regular income needs. The MIP category has delivered a five-year annualised return of 8.32 per cent (as on September 28), which scores over the returns offered by POMIS and FDs.
Further, we checked what your aunt’s status will be once the Direct Tax Code (DTC) is implemented from April 1, 2012. After that, the income from MIPs (dividend option), which earlier attracted dividend distribution tax (DDT) of 12.5 per cent, will be taxed according to the individual’s income tax slab. Her overall investments amount to Rs 24.30 lakh, which means she is most likely to fall in the 10 per cent income-tax bracket. Therefore, she should end up paying 2.5 percentage points less of tax (on income above basic exemption limit).
The second portfolio option is that she should trim her equity holdings to two funds. She should reduce her MIP exposure to 20 per cent of her portfolio and spread this part of her investment across two funds.
# Regularly monitor your portfolio because a good fund today may not remain good tomorrow
# Rebalance your portfolio at least once a year to maintain your asset allocation;
# Keep sufficient cash amounting to three-four times your monthly expenses in your bank account to meet emergencies;
# Once your FD/POMIS matures, consider shifting money to SCSS.
