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Ramalingam Kalirajan |8901 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 07, 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

Question by Sivar on Oct 07, 2024Hindi

I am 56 yrs age receiving sufficient monthly pension. Need to deploy 1 Cr retirement benefits into mutual funds for 5-10 years. Please can you advise on the funds I need to buy. Also please let me know if I can park the entire amount in a liquid etf and sell monthly to my bank for staggering the above deployment in 12-18 SIPs

Ans: You have Rs 1 crore to invest, a sufficient pension, and a 5-10 year investment horizon. Since you do not require immediate income, this allows for a balanced approach. Here’s a structured plan with a focus on stability, growth, and tax efficiency.

Asset Allocation for Stability and Growth
The first step is to divide your Rs 1 crore across different asset classes. Considering your age and financial goals, a balanced approach between equity and debt is suitable. The goal is to provide growth while keeping the risks in check. A 50-60% allocation in equity and 40-50% in debt is ideal for you.

Equity Allocation (50-60%): Equity provides inflation-beating returns over the long term. Since you have a 5-10 year horizon, equity can deliver substantial growth. However, risk needs to be managed.

Debt Allocation (40-50%): This portion brings stability. It ensures capital protection and provides regular interest income. This also helps to reduce volatility in the overall portfolio.

SIP for Staggered Investments: Smart Deployment Strategy
You are considering staggering your investment over 12-18 months. This is an intelligent strategy to reduce the impact of market volatility. Systematic Investment Plans (SIPs) allow you to spread your investments over time, which reduces the risks of market timing.

However, rather than parking your entire Rs 1 crore in a liquid ETF, consider liquid funds. Liquid ETFs are not ideal for regular withdrawals as they can fluctuate, unlike liquid mutual funds that are better suited for such purposes. Here's why:

Liquid Funds for Temporary Parking: Liquid mutual funds offer better stability than liquid ETFs. These funds are used to park money for short periods and provide easy liquidity with relatively better returns than bank savings accounts. You can redeem a fixed amount monthly and use it to stagger your equity SIP investments.

SIP into Actively Managed Funds: Actively managed mutual funds provide better chances of outperformance. Unlike index funds, actively managed funds are carefully curated by fund managers, offering higher returns when managed well.

Avoid Direct Mutual Funds and ETFs
Direct mutual funds may seem appealing due to lower expense ratios. However, unless you have a strong understanding of the market, the expertise of a Certified Financial Planner (CFP) can make a significant difference. Regular funds with the guidance of an MFD (Mutual Fund Distributor) who has CFP credentials offer professional fund management.

Also, avoid parking your entire Rs 1 crore in an ETF. Index funds or ETFs don’t offer flexibility in market conditions. The disadvantages of index funds include no scope for outperformance since they simply track the market. In contrast, actively managed funds have the potential for superior returns as fund managers take active positions in market opportunities.

Fund Categories to Consider for Equity Allocation
When investing in mutual funds, diversification is key. Here are some categories that should be a part of your equity portfolio. Avoid specific scheme names, but focus on these categories:

Large & Mid-Cap Funds: These funds invest in a combination of large, stable companies and mid-sized, growth-oriented firms. This mix provides a good balance between growth and stability.

Flexi-Cap Funds: These funds invest across large-cap, mid-cap, and small-cap companies, giving flexibility to fund managers to shift allocations depending on market conditions.

Multi-Cap Funds: These funds allocate across market caps, reducing the risk of focusing only on one segment of the market. They provide long-term growth potential.

Thematic or Sectoral Funds: These funds invest in specific sectors like technology, healthcare, or manufacturing. However, these funds should be a smaller portion of your portfolio, given their higher risk.

Fund Categories to Consider for Debt Allocation
Debt mutual funds will help secure your capital while providing steady income. Here's a broad recommendation on debt categories:

Corporate Bond Funds: These funds invest in high-quality corporate bonds, offering better returns than traditional FDs while maintaining a moderate risk profile.

Short-Term Debt Funds: Short-duration debt funds provide better interest than liquid funds and are suitable for short-to-medium-term investments.

Gilt Funds: These funds invest in government securities. Though they come with interest rate risks, they are the safest form of debt investment. They are ideal for conservative investors seeking stability.

Dynamic Bond Funds: These funds can adjust their portfolio based on the interest rate scenario, thus offering flexibility.

Tax Considerations for Mutual Fund Investments
Taxation is an important aspect of your investments. Here’s how mutual fund capital gains are taxed:

Equity Mutual Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: Gains from debt mutual funds are taxed according to your income tax slab for both short-term and long-term investments.

Dividends from Mutual Funds: Dividends are taxed as per your income tax slab, so it’s better to go for a growth option instead of dividend payout plans.

Emergency Fund and Liquidity
Ensure you have an emergency fund of 6-12 months' worth of expenses. You already have Rs 2 lakh in Fixed Deposits. You may want to increase this to Rs 6-8 lakh by either adding to your FDs or using liquid funds.

This provides a cushion in case of any unforeseen expenses. Liquidity is crucial in retirement planning.

Review and Rebalance Your Portfolio
Your financial journey does not stop after investing. It’s crucial to periodically review and rebalance your portfolio. Every year, evaluate the performance of your funds and make adjustments if necessary. This will help you stay aligned with your financial goals.

Estate Planning
Since you are approaching retirement, estate planning is important. Consider drafting a will or a trust to ensure the smooth transfer of wealth to your family. This adds a layer of security to your financial planning.

Final Insights
Investing Rs 1 crore into mutual funds can provide both growth and safety if done wisely. By staggering your equity investments through SIPs and allocating to both equity and debt, you can achieve steady returns. Use liquid mutual funds for parking and staggered withdrawals instead of liquid ETFs. The approach will allow you to reduce market risk and capitalize on long-term growth.

Finally, do regular portfolio reviews to ensure that your investments stay on track and are adjusted as needed.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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.