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Ramalingam

Ramalingam Kalirajan  |8334 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 12, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Jul 02, 2024Hindi
Money

Hi Sir I have 18 years old son started to college , I would like to transfer 10-15 lacs from my corpus to his to start MF and FD investment for longer run. what sort of precautionary measure to take to avoid any tax complications later. Thank you Kumar

Ans: Kumar,

Investing in your son’s future is a wise and caring move. To ensure smooth and efficient management, here are comprehensive steps and precautions for transferring funds into mutual funds and fixed deposits, along with ways to avoid tax complications later on.

Understanding the Investment Landscape
Investing in mutual funds and fixed deposits (FDs) can be highly beneficial. Each has its own advantages, risks, and growth potential. Let’s delve into both to understand them better.

Mutual Funds
Advantages:

Diversification: Mutual funds invest in a wide range of securities, reducing risk.

Professional Management: Fund managers use their expertise to manage your investments.

Liquidity: Easy to buy and sell mutual fund units as needed.

Power of Compounding: Long-term investments can significantly grow due to compounding.

Categories:

Equity Funds: Higher risk and higher returns, ideal for long-term goals.

Debt Funds: Lower risk, stable returns, good for short to medium-term goals.

Hybrid Funds: Mix of equity and debt, balancing risk and reward.

Risks:

Market Risk: The value of investments can fluctuate based on market conditions.

Interest Rate Risk: Changes in interest rates can affect debt funds' performance.

Inflation Risk: Returns may not always keep pace with inflation, affecting purchasing power.

Fixed Deposits (FDs)
Advantages:

Safety: FDs are considered safe with assured returns.

Fixed Returns: Interest rates are locked in, providing predictable income.

Tax Benefits: Some FDs offer tax benefits under Section 80C of the Income Tax Act.

Risks:

Lower Returns: FDs generally offer lower returns compared to mutual funds.

Liquidity: Early withdrawal can result in penalties.

Steps for Investing in Your Son's Name
1. Open a Bank Account
First, ensure your son has a bank account. This is essential for all subsequent investments and transactions. Ensure the account is in his name, with you as the guardian, if needed.

2. Open a Demat and Trading Account
For investing in mutual funds, a Demat and trading account in your son’s name is crucial. This facilitates easy purchase, holding, and selling of mutual fund units.

3. Know Your Customer (KYC) Compliance
Complete the KYC process for your son. KYC is mandatory for mutual fund investments. It involves submitting identity and address proofs, and your son needs to be compliant to invest.

4. Nomination
Ensure that a nomination is set up. It ensures smooth transfer of funds in case of unforeseen circumstances. You can be the nominee or appoint someone you trust.

Investment Strategy
Mutual Funds
Choosing the Right Funds:

Long-Term Goals: For long-term investments, equity mutual funds are ideal. They offer higher returns over time due to market growth and compounding.

Balanced Approach: Consider hybrid funds for a mix of equity and debt. They balance risk and provide steady growth.

Regular Funds vs. Direct Funds: Invest through a Certified Financial Planner (CFP). Regular funds managed by a CFP offer professional advice and management, ensuring better growth and risk management compared to direct funds.

Systematic Investment Plan (SIP):

SIP Benefits: Encourage your son to start a SIP. It promotes disciplined investing, averaging out market volatility, and leveraging the power of compounding.
Fixed Deposits
Laddering Strategy:

Laddering FDs: Divide the investment into multiple FDs with different maturities. This ensures liquidity and better management of interest rate risks.

Reinvestment: Upon maturity, reinvest the FD for continued growth. Align maturity dates with future financial needs.

Tax Considerations
Clubbing of Income
Avoid Clubbing:

Minor’s Income: Income earned by a minor is clubbed with the parent’s income. To avoid this, ensure the investments are in your son’s name post attaining majority.

Transfer Post-Majority: If your son is 18, transfer investments to his name directly. This prevents income clubbing, reducing your tax burden.

Gift Tax
Exemptions:

Gifts to Son: Any amount transferred to your son is exempt from gift tax. Utilize this exemption to transfer funds without any tax implications.
Capital Gains Tax
Long-Term and Short-Term Gains:

Equity Funds: Long-term capital gains (LTCG) above Rs 1 lakh in a financial year are taxed at 10%. Short-term gains are taxed at 15%.

Hybrid Debt Funds: LTCG on debt funds are taxed at 20% with indexation benefits. Short-term gains are added to your income and taxed as per the applicable slab.

Tax-Saving Strategies
Tax-Saving Funds:

ELSS: Consider investing in Equity Linked Savings Scheme (ELSS). It offers tax benefits under Section 80C and potential for good returns.

5-Year FDs: Invest in tax-saving FDs with a 5-year lock-in period. They offer tax benefits under Section 80C.

Monitoring and Review
Regular Monitoring
Track Performance: Regularly monitor the performance of your investments. Use online tools and apps to stay updated.

Annual Review: Conduct an annual review of the portfolio. Adjust allocations based on market conditions and financial goals.

Rebalancing
Maintain Balance: Rebalance the portfolio periodically to maintain the desired asset allocation. This ensures optimal growth and risk management.

Avoid Emotional Decisions: Stay focused on long-term goals. Avoid making investment decisions based on short-term market fluctuations.

Ensuring Smooth Transfer of Assets
Nomination and Will
Nomination:

Nomination: Ensure nominations are updated for all investments. This simplifies the transfer process in case of unforeseen events.
Will:

Draft a Will: Draft a will clearly stating the distribution of assets. This ensures that your son receives the intended investments without legal hassles.
Power of Attorney
Legal Authorization:

Power of Attorney: Consider granting a power of attorney to a trusted person. This ensures that your investments are managed smoothly in case of any incapacity.
Final Insights
Investing in your son's future through mutual funds and fixed deposits is a commendable decision. It provides financial security and helps build a substantial corpus over time. By understanding the advantages and risks associated with mutual funds and fixed deposits, you can make informed decisions.

Remember, mutual funds offer professional management, diversification, and the power of compounding, making them suitable for long-term growth. Fixed deposits, on the other hand, provide safety and fixed returns, ideal for conservative investors.

Ensure all investments are in your son’s name to avoid clubbing of income and utilize the gift tax exemptions effectively. Opt for tax-saving instruments like ELSS and 5-year FDs to optimize tax benefits.

Regularly monitor and review the portfolio, rebalancing it to maintain the desired asset allocation. Update nominations and draft a will to ensure a smooth transfer of assets.

By following these steps, you can secure your son’s financial future, allowing him to focus on his education and career without worrying about finances. You are setting a strong foundation for his future, and that is truly admirable.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Latest Questions
Ramalingam

Ramalingam Kalirajan  |8334 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 12, 2025

Asked by Anonymous - May 12, 2025
Money
I am 38 years old and self-employed, earning an average of 1.8 to 2 lakhs per month. I have a home loan of 44 lakhs (EMI is 46,000, tenure 15 years). There is no other liabilities. My investments include 11 lakhs in mutual funds, 3 lakhs in fixed deposits, and 1.5 lakh in gold. Should I focus on prepaying the home loan given my irregular income, or keep my investments intact and continue with EMIs?
Ans: You are doing quite well, especially with your investments and controlled liabilities. Your financial discipline is truly appreciable.

You are 38, self-employed, with Rs.1.8 to 2 lakhs monthly income.
Your current home loan is Rs.44 lakhs with EMI of Rs.46,000 for 15 years.
You have Rs.11 lakhs in mutual funds, Rs.3 lakhs in FDs, and Rs.1.5 lakhs in gold.
Your income is irregular, but you have no other liabilities.

Let us now do a 360-degree evaluation of whether to prepay the loan or stay invested.

 

Step-by-Step Financial Assessment
1. Evaluate the Stability of Your Income First
You earn between Rs.1.8 to Rs.2 lakhs per month.

 

But income is irregular. That needs caution.

 

Loan EMI is Rs.46,000 — about 25% of your average income.

 

If income drops in any month, EMI pressure will increase.

 

So we must first ensure EMI is always affordable, without stress.

 

Hence, liquidity is more important for you right now than aggressive loan prepayment.

 

2. Evaluate Your Emergency Reserve
You have Rs.3 lakhs in FD and Rs.1.5 lakhs in gold.

 

That makes it Rs.4.5 lakhs total liquid safety.

 

Your EMI is Rs.46,000, and personal expenses will also be there.

 

Ideal emergency fund for you = 6 to 9 months of expenses + EMI.

 

That is around Rs.6 to Rs.8 lakhs minimum.

 

So current emergency fund is slightly lower than ideal.

 

Please don’t use this for loan prepayment now.

 

3. Assess the Role of Mutual Funds
You have Rs.11 lakhs in mutual funds. That’s a solid step.

Now let’s assess whether to redeem this and prepay loan.

 

Should You Redeem Mutual Funds to Prepay?
Mutual funds, over long term, give better post-tax return than loan savings.

 

Loan interest is 8% to 9%, whereas mutual funds can give 11–13% in long term.

 

Especially if funds are equity-oriented and held for 5+ years.

 

You will also get capital gains tax exemption on Rs.1.25 lakhs LTCG annually.

 

If you redeem funds, you lose growth potential and compounding.

 

That hurts long-term wealth building.

 

So, do not redeem the entire Rs.11 lakhs in mutual funds.

 

4. Disadvantage of Early Loan Prepayment in Your Case
Prepaying early will reduce interest over time, yes.

 

But you may run into cash flow stress in slow months.

 

Once money is used to prepay, it cannot be taken back easily.

 

Liquidity once lost = flexibility lost.

 

Also, income tax benefit under Section 24(b) gets reduced if loan balance drops.

 

So it’s better to maintain balance between repayment and investment.

 

5. Best Strategy for You – A Balanced Approach
Let’s now craft the best plan for you.

 

Maintain Strong Liquidity First
Keep FD and gold untouched.

 

Increase emergency fund to at least Rs.6–Rs.7 lakhs.

 

For that, set aside extra Rs.2.5–Rs.3 lakhs from savings over time.

 

This makes your EMI safe even in low-income months.

 

Continue Your Mutual Fund SIPs Without Stopping
SIPs give long-term growth and beat loan interest in most cases.

 

Don’t stop mutual fund investments to prepay loan.

 

Stay invested. Let wealth compound.

 

Start Small and Periodic Prepayments
Don’t do bulk prepayment now. Do systematic small prepayments.

 

For example, Rs.25,000 to Rs.50,000 extra every 3–4 months.

 

When income is higher, use that surplus to prepay in parts.

 

Target 1–2 bulk part-payments per year.

 

This reduces tenure and interest slowly, without affecting liquidity.

 

Track Your Loan Amortisation Every 6 Months
Use netbanking or get a fresh loan statement every 6 months.

 

Check how each prepayment is reducing principal.

 

Adjust your strategy accordingly.

 

Avoid One-Time Full Prepayment
That would kill your long-term investment compounding.

 

Also removes your income tax benefit under Section 24(b).

 

Stay flexible. You are self-employed.

 

You need cash buffers more than salaried people.

 

Final Insights
Do not do bulk home loan prepayment from mutual funds now.

 

Keep SIPs going and maintain your compounding.

 

Grow your emergency fund to Rs.6–7 lakhs minimum.

 

Use surplus months to make small part-payments towards home loan.

 

This protects your peace and builds wealth at the same time.

 

Reassess in 2–3 years. You may be able to prepay more later.

 

You are already in a good financial position. Your thoughtful approach is praiseworthy.

 

Best Regards,
 
K. Ramalingam, MBA, CFP,
 
Chief Financial Planner,
 
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Ramalingam

Ramalingam Kalirajan  |8334 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 12, 2025

Money
i wish to purchase new car i10, should i purchase the same through own money or should i take a vehicle loan from bank and the money own by my to be kept as FDR or liquid mutual fund
Ans: It’s a good sign that you’re thinking before buying a car. You’re not rushing into it. That shows maturity and smart thinking.

We will now evaluate own money vs vehicle loan — from every angle.

 

Understanding the Nature of a Car Purchase
A car is not an investment.

 

It is a consumption asset, not a growth asset.

 

It depreciates every year. Its value goes down, not up.

 

So the cheaper the total cost, the better for your wealth.

 

Option 1: Use Own Money Fully
Pros

No interest cost. You save on total expenses.

 

You are free from monthly EMI pressure.

 

Car becomes fully yours from day one.

 

No need to deal with bank, forms, hypothecation etc.

 

Cons

Your liquid money reduces.

 

You may not have enough cash for emergencies.

 

Opportunity loss if you had invested that money.

 

Option 2: Take Vehicle Loan & Keep Own Money in FDR or Liquid Mutual Fund
Let’s evaluate this with care.

Vehicle Loan Pros

You can preserve your savings for emergencies.

 

EMI can be budgeted monthly, if income is stable.

 

Some banks offer competitive interest rates.

 

Vehicle Loan Cons

You will pay interest on a depreciating item.

 

Loan adds to your monthly obligations.

 

You must pay insurance, EMI, fuel, and service together.

 

FDR and Liquid Mutual Funds give lower returns than loan cost.

 

So you will likely lose more in interest than you gain.

 

Let's Compare: Interest Rate vs Investment Return
Vehicle loan interest is usually 9% to 11% per year.

 

FDR gives around 6% to 7% before tax.

 

Liquid mutual funds give 6% to 7.5% on average.

 

So you pay more to the bank than you earn from investment.

 

Tax on interest or gains reduces actual return further.

 

This means taking a car loan and investing your own money leads to net loss.

 

Best Option for You: Smart Compromise Approach
Let me share a wise solution.

 

Don’t use full own money. Don’t take full loan either.

 

Instead, pay 70–80% from own funds.

 

Take a small car loan for the remaining 20–30% only.

 

This keeps EMI low and retains some liquidity.

 

You reduce interest cost and also keep Rs.50,000–Rs.1 lakh aside.

 

Park that in liquid fund for any urgent need.

 

Repay this small loan fast in 1–2 years.

 

Only Take a Car Loan If:
Your job income is stable.

 

You already have 3–6 months emergency fund ready.

 

You don’t have big loans running now.

 

You can pay EMI without affecting savings.

 

You commit to close the loan early.

 

Avoid This Mistake:
Never buy a more expensive car because loan makes it “feel affordable.”

 

Loan should not expand your car budget.

 

Whether you buy with loan or cash, pick a simple car within limits.

 

i10 is a wise, middle-ground choice. Good thought.

 

Tax Angle (If Business Use)
If you are using the car for business, vehicle loan interest may be tax-deductible.

 

But for personal use, there is no tax benefit.

 

So do not take loan just for imagined tax saving.

 

Final Insights
A car is a need, not an investment.

 

Using your own money fully keeps things simple and cheap.

 

Taking a full car loan and investing the money gives net negative return.

 

Best option is a split approach — pay major part from own funds.

 

Take small loan only if needed and close it early.

 

Always keep emergency money aside before buying.

 

Avoid emotional buying or overbudget cars.

 

Your financially balanced approach is very appreciable.

 

Best Regards,
 
K. Ramalingam, MBA, CFP,
 
Chief Financial Planner,
 
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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