45-Year-Old Man in Tier II City Wants to Generate 60 Lakhs Annually: Seeking Investment Advice

Ans: Your current asset base is diversified across real estate, agricultural land, and gold. These assets have significant value but offer limited liquidity and passive income. Your primary income sources are from your business, agricultural land, and rental properties. However, to reach an annual income of Rs. 60 lakhs, you need to reassess your assets and investments. Selling some of your real estate assets and reinvesting the proceeds into more liquid and growth-oriented avenues, like Mutual Funds (MFs) and Category 3 Equity AIFs, can help you achieve your income goals. Below is a detailed plan to guide your financial decisions.

Evaluating and Managing Real Estate Assets
Agricultural Land I (Approx. Rs. 14 Crore)
This land holds substantial value but generates no income. Given its high growth potential, consider holding onto it. This asset could appreciate significantly over time, providing a substantial return in the future. However, it’s crucial to have a clear timeline and strategy for when and how you might monetize this asset.

Agricultural Land II (Approx. Rs. 4 Crore)
This land generates income but has slow growth. The income from this land is stable, and it adds to your passive income. However, considering your goal to generate Rs. 60 lakhs annually, you might consider selling this land. The proceeds can be reinvested in more growth-oriented avenues that align with your income goals.

Residential Plots (Total Approx. Rs. 2 Crore)
These plots are spread across various locations and sizes. They may not generate income currently but have the potential for appreciation. If you do not have immediate plans to develop or sell them, consider liquidating one or more of these plots. The proceeds can be redirected towards investments with higher liquidity and growth potential.

Apartments (Total Approx. Rs. 1.4 Crore)
The apartments, valued at Rs. 1.4 crore, contribute to your rental income. Since they provide regular cash flow, you might consider holding onto them. However, if better opportunities arise, selling one apartment and reinvesting in higher-yielding instruments could be considered.

Independent Houses (Total Approx. Rs. 2.2 Crore)
One house serves as your current residence, which should be retained for personal use. The second house, however, can be considered for sale. This property is an ideal candidate for liquidation to free up funds for investments that can generate the desired income.

Liquidating and Reallocating Assets
Based on the above evaluation, here is a suggested approach for liquidation and reinvestment:

Sell Agricultural Land II (Rs. 4 Crore): Reinvest the proceeds in Category 3 Equity AIFs and Mutual Funds. These can offer higher returns and align with your income goals.

Sell One or Two Residential Plots (Approx. Rs. 1 Crore): Consider selling the smallest or least promising plots. The proceeds can be directed towards mutual funds, which provide regular returns and capital appreciation.

Sell One Independent House (Approx. Rs. 1.2 Crore): The proceeds from this sale can be invested in a mix of Category 3 Equity AIFs and mutual funds. This strategy can help generate higher returns while diversifying your investment portfolio.

Retain the Remaining Assets: The remaining assets, including Agricultural Land I, your primary residence, and the apartments, can be retained for long-term growth and regular income.

Investing in Category 3 Equity AIFs
Why Choose Category 3 Equity AIFs?
Category 3 AIFs (Alternative Investment Funds) focus on equity investments but operate with a more aggressive and flexible approach than traditional mutual funds. They employ strategies like long-short equity, arbitrage, and other complex trading strategies to generate high returns. These funds are ideal for investors looking for high growth potential but are comfortable with higher risk.

Advantages of Category 3 Equity AIFs:

Higher Returns: These funds have the potential to deliver significantly higher returns than traditional equity mutual funds.

Diversification: They provide exposure to a wide range of strategies and asset classes, helping to diversify your portfolio.

Professional Management: These funds are managed by experienced fund managers who can navigate market volatility and make informed investment decisions.

Suggested Allocation:

50% in Growth-Oriented Category 3 AIFs: Focus on funds that invest in high-growth sectors like technology, healthcare, and consumer goods. These sectors have the potential for high returns in the long term.

25% in Balanced Category 3 AIFs: These funds employ a mix of equity and debt strategies to balance risk and return. They can provide stable returns while still offering growth potential.

25% in Aggressive Category 3 AIFs: These funds take on higher risk but aim for maximum returns through strategies like leverage and short-selling. Allocate a smaller portion here to balance the risk in your portfolio.

Investing in Mutual Funds
Why Invest in Mutual Funds?
Mutual funds are a versatile investment option that offers diversification, professional management, and liquidity. They can be tailored to meet different financial goals, such as generating regular income or achieving capital appreciation. By investing in a mix of equity, debt, and hybrid mutual funds, you can create a balanced portfolio that meets your income and growth objectives.

Advantages of Mutual Funds:

Diversification: Mutual funds invest in a diversified portfolio of stocks, bonds, and other securities, reducing risk.

Professional Management: Fund managers actively manage the portfolio to maximize returns and minimize risks.

Liquidity: Mutual funds are more liquid than real estate and can be easily converted to cash.

Suggested Allocation:

40% in Equity Mutual Funds: Focus on funds that invest in large-cap, mid-cap, and multi-cap stocks. These funds provide growth potential and can help build wealth over the long term.

30% in Hybrid Mutual Funds: These funds invest in a mix of equity and debt, providing a balance between risk and return. They can offer stability and regular income, which aligns with your goal of generating Rs. 60 lakhs annually.

20% in Debt Mutual Funds: These funds invest in fixed-income securities and offer lower risk with stable returns. They can provide a safety net and ensure liquidity in your portfolio.

10% in Sectoral/Thematic Funds: Allocate a smaller portion to funds that focus on specific sectors like technology, healthcare, or infrastructure. These funds can provide higher returns, albeit with higher risk.

Creating a Balanced Investment Strategy
Asset Allocation:
Your investment portfolio should be diversified across different asset classes to balance risk and return. The proposed allocation between Category 3 Equity AIFs and mutual funds ensures that you have a mix of high-growth and stable income-generating investments.

Regular Monitoring:
It is crucial to regularly review your investment portfolio to ensure it aligns with your financial goals. Market conditions change, and your portfolio should be adjusted accordingly. Engage with a Certified Financial Planner to help with ongoing monitoring and adjustments.

Risk Management:
Investing in Category 3 AIFs and equity mutual funds comes with inherent risks. However, these risks can be managed through diversification and regular portfolio rebalancing. It is important to be aware of the risks and invest according to your risk tolerance and time horizon.

Generating Rs. 60 Lakhs Annually
Based on the above strategies, here’s how you can achieve your goal of generating Rs. 60 lakhs annually:

Business Income (Rs. 12 Lakhs): Continue to maintain and grow your business income. This is a stable source of revenue.

Rental Income (Rs. 4.8 Lakhs): Continue earning rental income from your properties. If needed, consider optimizing your rental strategy to increase this income.

Agricultural Income (Rs. 6 Lakhs): Retain Agricultural Land I for future growth and keep generating passive income from Agricultural Land II until it is sold.

Investment Income (Rs. 40+ Lakhs): The income gap can be filled by investing the proceeds from the sale of selected real estate assets into Category 3 Equity AIFs and mutual funds. These investments can provide the growth and regular income needed to reach your Rs. 60 lakh target.

Tax Considerations
While planning your investments, it’s essential to consider the tax implications. Income from mutual funds and AIFs is subject to taxation based on the type of fund and the holding period. Long-term capital gains (LTCG) from equity-oriented funds are taxed at 12.5% above Rs. 1.25 lakh, while short-term capital gains (STCG) are taxed at 20%. Consult a tax advisor to optimize your tax liability and maximize post-tax returns.

Final Insights
Achieving an annual income of Rs. 60 lakhs is feasible with your current assets, but it requires a strategic approach to asset liquidation and reinvestment. By selling selected real estate assets and reinvesting in Category 3 Equity AIFs and mutual funds, you can create a diversified portfolio that balances growth and income. Regular monitoring, risk management, and tax planning are essential to ensure that your financial goals are met.

This plan allows you to retain some of your high-potential real estate assets while converting others into more liquid and income-generating investments. By carefully selecting your investments and regularly reviewing your portfolio, you can achieve financial security and meet your income goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in