PROFILE
Abhijit Jadhav, after his father's demise, wanted to address all the issues regarding his mother's finances.
The start was positive, as the money received from her husband's provident fund account would serve as the bedrock on which her future financial security could be based.
CURRENT INVESTMENTS
Mutual Fund-ELSS: Rs 50,000;
Fixed Deposit (maturing in June 2012): Rs 22 lakh;
Savings bank account: Rs 50,000.
There is some worry regarding the falling interest rate scenario; FDs might not be renewed at the same rates.
GOALS
Monthly expenses: Rs 9,000;
Daughter's tuition fee: Rs 30,000;
Abhijit's marriage: Rs 80,000;
Interest income: Rs 19,000
Abhijit also wants to know what instruments including monthly income plans (MIPs) can help.
* The portfolio is mainly built up of fixed income investments.
Problem: Income that will accrue from these instruments will fail to keep pace with inflation
* Medical insurance of Rs 1 lakh looks insufficient.
Problem: Medical needs might turn out to be more
* Investment in a mutual fund was lumpsum.
Problem: When you invest a lumpsum in equities, the investment becomes vulnerable to sudden market movements. Investments in mutual funds should be done via systematic investment plan (SIP). For instance, the present fund investment fox Abhijit is down by about 30 per cent. Had Rs 10,000 been invested every month from April 2007 to January 2008, this investment would have been down just about 10 per cent today.
* Income from bank FDs is Rs 1.90 lakh and will be taxable.
Problem: Presently, annual tax works out to be more than Rs 3,500 per annum. Paying tax can be avoided by investing in instruments specified below.
THE PROPOSAL
* Invest in balanced funds. Balanced funds invest about 65 per cent of their assets in equity and the rest in debt instruments. With 30 per cent of the portfolio in balanced funds, you will have about 20 per cent of the portfolio in equities which will help you fight inflation.
How? Target a 30 per cent allocation to balanced funds. Start with investing the extra income from FDs (Rs 10,000 per month) in balanced funds. Once the FDs mature, start investing systematically in balanced funds to attain the portfolio allocation. Choose from HDFC Prudence, Magnum Balanced, DSPBR Balanced and Canara Robeco Balance. Regularly rebalance to ensure that the allocation to balanced funds does not move away from the planned allocation.
* Save on income-tax. Investments in equities can also be tweaked to achieve the additional goal of tax-saving.
How? You can invest in tax-saving funds (ELSS) to the extent of the taxable income. Do this by way of either investing the spare income, if any, or shifting from the balanced fund to the ELSS. Magnum Taxgain, HDFC Taxsaver and Sundaram BNP Paribas Tax Saver are good picks. But avoid investments in Public Provident Fund and National Savings Certificate, as they involve a longer lock-in (15 years and six years, respectively) as compared to ELSS (three years). This will be a compromise on liquidity.
* Increase medical insurance limit. You should increase the sum assured to about Rs 3 lakh to meet any medical emergencies.
ACHIEVABLE?
Earning a return of 10 per cent per annum, the portfolio can help meet her needs for a sum of Rs 9,000 per month, which can later be increased at about 6-7 per cent per annum as prices rise.
Income from fixed income investments (forming 70 per cent of the portfolio) will stay constant over the years. When this income falls short, withdrawals from the balanced funds can be made. These withdrawals will be tax-free after one year.
Can monthly income plans (MIPs) help when interest rates fall? In any market situation, performance of a mutual fund depends on the fund manager's decisions. MIP schemes keep more than 80 per cent of their assets in fixed instruments. The rest is invested in equities, which help them generate more returns than pure debt funds in a rising market. But being a mutual fund, neither the principal nor the returns are assured.
The dividends that the scheme will distribute will be taxed at 14.28 per cent. This can be a tax-efficient option when the interest from the fixed income portfolio falls under the 20 per cent or 30 per cent tax slab, and about 20 per cent of your fixed income portfolio can be invested in MIPs.
Any other instruments? For generating fixed income, you can also look at the Post Office monthly income scheme, which will pay interest at 8 per cent per annum, taxable in the hands of the account holder.
Some other options that can be looked at are National Savings Certificate, Public Provident Fund and Kisan Vikas Patra. While interest from NSC and KVP will be taxable, that from PPF will be tax-free.