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Financial planning for my sister who received funds after her husband's passing

Ramalingam Kalirajan |7290 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Sep 04, 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 Rahul on Sep 03, 2024Hindi

Asking for a sister, she got some funds post her husband demise earlier this year, need advise on the investment strategy, total amount to be invested is 70 Lacks, based on time period of funds requirements I have selected the investment strategy, appreciate any advise from experts. My sister is a teacher and currently earns 60 K per months, she has a daughter studying in 7th grade, currently family is supportive and we don’t need regular income. Below investment to be done from ultra short debt fund via STP over 12-18 months . Funds for Pre Grad after 10th- FD - 10 L INR, time invested - 3 years Funds for Grad-1st half- 10 L INR - hdfc hybrid debt fund, time invested - 5 years Funds for Grad-2nd half- 10 L INR- hdfc balanced advantage fund, time invested - 7 years Masters - 20 L - hdfc top 100 fund, time invested - 8 years Other- 20 L - hdfc flexi cap fund, time invested - 10+ years

Ans: Your sister’s situation requires a well-considered investment strategy. Your approach to allocate funds based on the time horizon is commendable. This ensures that each financial goal is adequately addressed. However, there are some important aspects that could further optimize this plan.

Evaluating the Existing Strategy
Pre-Graduation Fund (3 Years): You plan to invest Rs. 10 lakh in a Fixed Deposit (FD). This choice is conservative and suitable for a 3-year horizon. However, FDs may offer lower returns compared to debt mutual funds. Consider diversifying with short-term debt funds for potentially better returns with relatively low risk.

Graduation Fund - First Half (5 Years): You intend to invest Rs. 10 lakh in a hybrid debt fund. This is a balanced approach that offers a mix of equity and debt. It is ideal for a medium-term horizon, providing a good balance between risk and return.

Graduation Fund - Second Half (7 Years): You are considering a balanced advantage fund. These funds dynamically shift between equity and debt, offering flexibility. They are well-suited for a 7-year horizon, balancing growth and stability.

Masters Fund (8 Years): You have allocated Rs. 20 lakh to a large-cap fund. Large-cap funds are generally stable and offer reasonable growth. They are suitable for long-term goals, ensuring steady appreciation with lower volatility compared to mid or small-cap funds.

Long-Term Fund (10+ Years): You plan to invest Rs. 20 lakh in a flexi-cap fund. Flexi-cap funds offer the flexibility to invest across market capitalizations. This can potentially maximize returns over a long period, making them suitable for a 10+ year horizon.

Recommendations for Improvement
Consider Actively Managed Funds Over Index Funds
If you are considering index funds, it’s important to note that actively managed funds may offer better returns, especially in the Indian market. Fund managers in actively managed funds have the flexibility to adjust portfolios based on market conditions. This could lead to superior returns compared to index funds that simply track a market index.

Benefits of Regular Funds Over Direct Funds
Direct funds might appear attractive due to lower expense ratios, but they require significant time and expertise. Regular funds, especially when invested through a Certified Financial Planner (CFP), offer professional guidance. This helps in making informed decisions, optimizing returns, and reducing risks. The added value of advice often outweighs the marginal cost difference.

Reconsider Fixed Deposits
While FDs offer safety, their returns might not keep pace with inflation. For the Pre-Graduation Fund, you might consider investing in short-term debt funds instead. These funds offer better returns with similar levels of safety, making them a more effective choice for a 3-year horizon.

A More Diversified Approach
Short-Term Goals (1-3 Years): Consider a mix of short-term debt funds and ultra-short duration funds. These offer better returns than FDs with low risk.

Medium-Term Goals (3-7 Years): Hybrid funds are a good choice, but consider diversifying with conservative hybrid funds for a more stable return profile.

Long-Term Goals (7+ Years): Large-cap and flexi-cap funds are well-suited for these horizons. Ensure that the chosen funds have a strong track record and are managed by experienced fund managers.

Systematic Transfer Plan (STP) Strategy
Your idea of using an ultra-short debt fund and transferring the amount systematically over 12-18 months is sound. It reduces market timing risk and averages out the investment cost. This is particularly beneficial in volatile market conditions.

Final Insights
Regular Review: Regularly review the investment portfolio to ensure it remains aligned with your sister’s goals. Market conditions and personal circumstances can change, and adjustments may be necessary.

Emergency Fund: Although the family is supportive, it’s advisable to keep a small emergency fund. This ensures liquidity in case of unforeseen expenses.

Professional Guidance: Partnering with a Certified Financial Planner (CFP) will provide personalized advice. This helps optimize the investment strategy, ensuring your sister's and her daughter's financial security.

Your strategy is thoughtful and well-planned. By fine-tuning it with the suggestions above, your sister can ensure a secure financial future for herself and her daughter.

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.