Inherited around 20 Crores in liquidity
Other assets including property totally valued at 35 Crores
Want to invest that 20 Crores for atleast 12 to 15 % return also considering inflation of 6 %
I was thinking to put all into tax free bonds with atleast 7 % return taking a yearly payout and reinvesting them in MF and Equity
Is that a good approach ?
Ans: You’ve inherited Rs. 20 crores in liquidity, along with other assets valued at Rs. 35 crores. It’s impressive that you’re thinking ahead about investing this significant amount. With a target of 12-15% returns, while considering inflation at 6%, your approach needs to be strategic. Your plan to invest in tax-free bonds and reinvest the payouts in mutual funds and equity requires careful evaluation.
Evaluating the Current Strategy
Let’s analyse your current idea of investing the entire Rs. 20 crores into tax-free bonds with a 7% return and reinvesting the annual payouts into mutual funds and equity.
Tax-Free Bonds
Steady Income but Lower Returns: Tax-free bonds are excellent for generating stable, tax-efficient income. However, the returns are usually capped at around 7%, which is lower than your target of 12-15%.
Limited Growth Potential: While these bonds provide safety and tax efficiency, they don’t offer much in terms of capital appreciation. Your strategy needs to consider growth, especially if inflation is at 6%.
Reinvestment Challenge: Reinvesting the yearly payout in mutual funds and equity is a sound idea, but the returns from bonds might not be substantial enough to meet your overall return target. Over time, the real value of your investment could erode due to inflation.
Mutual Funds and Equity
Higher Potential Returns: Mutual funds and direct equity investments have the potential to generate the 12-15% returns you’re aiming for. However, they come with higher risk and volatility.
Actively Managed Funds Over Index Funds: You should focus on actively managed mutual funds. They have the potential to outperform index funds, especially in a dynamic market. Index funds may not give you the alpha you need to achieve your goals, given their passive nature and average returns.
Regular Funds Over Direct Funds: Investing through a Certified Financial Planner (CFP) or Mutual Fund Distributor (MFD) can provide you with professional guidance. Direct funds may seem cost-effective, but regular funds give you access to expert advice, which is crucial for optimizing returns and managing risks effectively.
Alternative Investment Strategies
Given the limitations of the current approach, it’s essential to explore alternatives that could better align with your goals.
Balanced Portfolio Approach
Diversification is Key: Consider diversifying your Rs. 20 crores across various asset classes. A balanced approach with a mix of equity, debt, and alternative investments can provide growth while managing risk.
Equity Allocation: Allocate a significant portion to equity, say 50-60%, to capture higher returns. This can be done through mutual funds, direct equity, or a combination of both.
Debt Instruments: While tax-free bonds can be part of the debt allocation, you might want to explore other debt instruments like debt mutual funds, which offer better post-tax returns, especially when held long-term.
Alternative Investments: Consider alternative investments like private equity, venture capital funds, or even international funds. These can add a layer of diversification and potential for higher returns.
Systematic Investment Plan (SIP)
Gradual Exposure: Instead of a lump sum investment, consider investing in equity and mutual funds through a Systematic Investment Plan (SIP). This approach allows you to spread out your investments, reducing the risk of market timing and averaging out the cost.
Rupee Cost Averaging: SIPs provide the benefit of rupee cost averaging, which helps in accumulating units at varying prices, reducing overall investment risk.
Structured Products
Custom Solutions: Explore structured products that are designed to meet specific financial goals. These products can offer a mix of equity, debt, and derivatives, providing a tailored solution to achieve your return target.
Risk Management: Structured products often come with built-in risk management features, which can be beneficial in protecting your capital while aiming for higher returns.
Addressing Inflation and Taxes
Inflation-Protected Investments
Growth Focus: To combat inflation, a significant portion of your portfolio must be growth-oriented. Equity investments, especially in sectors with high growth potential, can help in staying ahead of inflation.
Reinvesting for Growth: Reinvesting dividends and interest from your investments can compound your returns, helping you stay ahead of inflation over the long term.
Tax-Efficient Investing
Debt Fund Advantage: While tax-free bonds are appealing, hybrid debt funds offer tax efficiency through indexation benefits. This can result in a lower tax burden on your debt investments, improving post-tax returns.
Equity Taxation: Equity investments held for over a year benefit from favourable long-term capital gains tax rates. Plan your equity investments with a long-term horizon to maximize tax efficiency.
Risk Management and Capital Protection
Diversification
Spread Risk: Diversify across multiple asset classes to manage risk effectively. Avoid putting all your eggs in one basket. By spreading your Rs. 20 crores across different investments, you can achieve a balance between risk and return.
Review and Rebalance
Periodic Review: Regularly review your portfolio with the help of a Certified Financial Planner (CFP). This ensures that your investments remain aligned with your goals and market conditions.
Rebalancing: Adjust your portfolio periodically to maintain the desired asset allocation. This can help in locking in profits and reinvesting in underperforming assets that have the potential to grow.
Final Insights
Ajay, your goal of achieving 12-15% returns is ambitious but achievable with a well-thought-out strategy. While tax-free bonds provide safety, they may not be sufficient to meet your target. A diversified approach, with a mix of equity, debt, and alternative investments, is essential.
Focus on actively managed funds and consider SIPs for gradual equity exposure. This will help you achieve your return targets while managing risk. Regular reviews and rebalancing will keep your portfolio on track.
With this approach, you can confidently grow your Rs. 20 crores while staying ahead of inflation and taxes.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
