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Ramalingam Kalirajan |6675 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 17, 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 - Oct 17, 2024Hindi

Hi. I am 42 year male. I have a steady secure job. I have invested 2 Cr in commercial real estate which I will never sell, is giving me 70,000/- per month passive income. I stay with my parents. My MF portfolio has 60 Lakhs already invested in Predominantly Small caps (which I will withdraw after 20 years). I have medical insurance and emergency funds. I can sustain my family and kids expenses, with my salary. But can't do any more investment now. Am I going on right path for massive wealth creation?

Ans: You are in a stable position with your job, passive income from real estate, and a long-term investment strategy in mutual funds. You have already invested Rs 2 crore in commercial real estate, generating Rs 70,000 per month in passive income, which is a healthy contribution towards your financial stability.

Additionally, you have Rs 60 lakh invested in small-cap mutual funds, which you plan to hold for 20 years. Your medical insurance, emergency fund, and ability to cover family expenses with your salary are strong foundations for wealth creation. However, the question is whether this approach aligns with your long-term goal of “massive wealth creation.” Let's break it down.

Passive Income from Real Estate
Your commercial real estate investment provides a stable passive income. You have no intention to sell this property, which makes it a permanent part of your financial plan.

Advantages:

Provides a consistent income of Rs 70,000 per month.

Offers long-term financial security without needing to liquidate assets.

Income from commercial property tends to appreciate over time.

Points to Consider:

Commercial real estate lacks liquidity. If at any point you need to access the capital, it won’t be easily available.

Income is subject to taxation based on your slab rate, which reduces the net inflow.

While real estate does contribute to a secure financial future, it should not be your sole focus for wealth creation. Diversification in liquid assets is essential.

Mutual Fund Investment in Small Caps
Your investment of Rs 60 lakh in small-cap funds shows that you’re aiming for long-term growth. Small-cap funds have high growth potential but come with high risks as well.

Advantages:

Small caps can generate higher returns in the long term, as you are looking at a 20-year horizon.

Historically, small caps outperform large caps in the long run.

Staying invested for 20 years reduces short-term volatility.

Points to Consider:

Small-cap funds can be volatile, especially during economic downturns.

It’s important to ensure that your portfolio isn't overly concentrated in one asset class. Right now, small caps form a significant portion of your portfolio, and this could expose you to higher risks.

Review and rebalance periodically. Small-cap funds might perform well, but reviewing the performance every few years is important to ensure they align with your goals.

If your objective is wealth creation, small-cap funds are a good vehicle, but you might want to diversify further to reduce risks.

No Additional Investments for Now
You mentioned that you cannot make any more investments currently, which is understandable given your family responsibilities and expenses.

Advantages:

You are financially secure, as your salary covers your day-to-day and family expenses.

Your current investments are already substantial, giving you peace of mind.

Points to Consider:

While it’s good that your salary covers your expenses, future opportunities to invest more should be explored when your financial situation allows. More capital invested earlier could compound significantly over the years.

Consider automated increases in investments. As your salary grows, you can set up an automated increase in SIPs (Systematic Investment Plans) to keep contributing without feeling an immediate financial pinch.

Insurance and Emergency Fund
You have a medical insurance policy and an emergency fund in place, which is essential for financial stability.

Advantages:

This ensures that any medical emergencies or sudden expenses don’t derail your long-term financial plans.

With adequate coverage, your focus on wealth creation remains unaffected by unexpected financial burdens.

Points to Consider:

Ensure that your insurance coverage is adequate for future needs, especially as medical costs rise.

Keep your emergency fund separate and only use it for unforeseen situations. It should ideally cover 6–12 months of living expenses.

Diversification for Long-Term Wealth Creation
Massive wealth creation comes from a balance between high-growth assets like small caps and more stable, diversified investments. Although your current investment strategy has potential, focusing solely on real estate and small caps may not be the best approach for building a massive corpus.

Suggestions:

Increase Diversification: Over time, you might want to add mid-cap and large-cap mutual funds to your portfolio. This will help reduce risk while ensuring reasonable returns.

Tax-Efficient Investments: Consider tax-efficient avenues for investment that can help reduce the tax burden on your passive income and investment returns.

Avoid Over-Concentration: While small caps have the potential for higher returns, avoid putting all your long-term savings into one category. If possible, when your financial situation allows, diversify across other types of funds like balanced funds or even debt funds.

Taxation Considerations
Your commercial real estate income and capital gains from mutual funds are taxable. Keep in mind the taxation on mutual funds:

For equity mutual funds, long-term capital gains (LTCG) over Rs 1.25 lakh are taxed at 12.5%.

Short-term capital gains (STCG) are taxed at 20%.

For debt mutual funds, LTCG and STCG are taxed according to your income tax slab.

To maximise your post-tax returns, consider discussing tax-saving strategies with a Certified Financial Planner.

Can You Achieve Massive Wealth Creation?
Based on your current investments, you are on the right path to financial stability, but achieving massive wealth creation will require careful planning and some adjustments in the future.

Your Strengths:

Real estate provides passive income that adds to your financial security.

You have invested in small caps, which have high growth potential over 20 years.

Your income can sustain your current lifestyle and family expenses.

Areas to Improve:

Your investments are currently heavily concentrated in small caps and real estate. Adding mid-cap and large-cap funds will help reduce risk.

You may want to gradually increase your investment amount over time as your financial situation improves.

Keep tax implications in mind to maximise your wealth.

Final Insights
You are on a steady financial path, and your investments have good growth potential. However, massive wealth creation requires a more diversified approach. You have the foundation to build upon, and with some adjustments in your portfolio and future investment strategy, you can aim for significant wealth over time.

When your financial situation allows, consider diversifying across various mutual fund categories and look into tax-efficient investment strategies. Additionally, regular reviews of your portfolio will ensure that you stay on track to meet your long-term goals.

Best Regards,

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

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