Financial planning: Readers' Corner

For the past 10 years, I have been saving for my children’s education by investing in mutual funds. My eldest son is now 21 and the younger one is 19. My elder son will need the money in two years. I am very close to meeting the corpus that I had in mind. Should I now start redeeming and putting the money in my bank account with a sweep in deposit facility?

Yes. But instead of redeeming the money I would recommend that you switch it into short-term funds. The returns will be a little more than those from a sweep-in deposit account. Redeem in parts so that you can earn a bit more from the allocation that will remain in equity funds. Don’t forget to calculate the capital gains when you sell and pay your advance tax in good time.

I am planning to create a corpus of Rs 10 million in a short period. I am 34 working with a monthly income of Rs 150,000. How can I invest in mutual funds so that I can build that wealth, how long time will it take for me? My monthly expenses arearound 60,000.  Which funds should I invest in, will I be needed to correct my portfolio every year? 

With an expected investment potential of Rs 90,000 a month reaching a target of Rs 10 million should be reasonably comfortable by adopting a strategy of investing into equity mutual funds. It will take you approximately six years to achieve this target. Create a portfolio of mutual funds choosing large-cap, mid-cap, small-cap and sector-specific funds. Many online portals provide excellent education and information for researching and investing in mutual funds. There is no need to correct the portfolio every year; you may review each year and restructure every four to seven years and that too, only if necessary.

My stock broker offers systematic investment plan (SIP) in stocks. It has select large-cap Sensex companies on offer. I already make investments through mutual fund and wish to allocate a small amount directly to stocks to understand how it works. Is SIP in stock a good idea?

SIP in equities is not quite the same as doing SIP in a mutual fund. The fundamental difference to understand is that in an equity portfolio you are responsible for all decisions. The broker is not going to tell you what to sell and when. So you can consider SIP into equities under the circumstances where you are planning to buy a stock or a basket of stocks and want to hold it forever. Also, you will have to keep monitoring the financial health of the companies that you’re going to buy through SIP. You will also need to diversify stocks. Calculating capital gains on direct equity investment via SIP can be quite a headache. Against this, by doing an SIP in a mutual fund, all your worries are taken away and a professional team is taking care of your portfolio.

I am planning to buy a car that costs Rs 550,000. I have investments worth Rs 1.3 million. Should I break my investments or take a loan? I am in the early thirties.

 

Consider that you are paying in cash to buy a car loan, you will lose an opportunity to earn returns on your investment. Secondly, when you spend cash on a car, the value of such assets depreciates as soon as you drive the car out of the showroom.

If the returns earned on your investment covers the financing cost, that is, equated monthly instalment (EMI) of a car loan, then getting a loan would be more beneficial than paying it outright. Alternatively, if you’re in a position to be able to afford the EMI of the car loan, then get the loan and investment to make the prepayments.

I am planning to invest in Sukanya Samriddhi Yojana (SSY) for my daughter, who is seven. I want to know if it’s the best possible option for the next 11 years, or should I opt for child plans from insurance or mutual funds?

SSY is not a bad option but is not the best option. Ideally, consider mutual funds and within that aggressive mutual funds like mid- and small-cap funds to create enormous wealth for your children. Consider this: Rs 150,000 invested every year for the next 11 years in SSY will give you guaranteed Rs 2.9 million. Against this, you can expect a minimum of Rs 4.2 million or more via mutual funds. Most child plans from most insurance companies are the worst plans to buy.

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


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