Investing with a Monthly Salary of 96,000, Mutual Funds, and ULIPs: Am I On the Right Track?

Ans: You are doing well by investing in mutual funds and planning for your financial future. Your salary of Rs. 96,000 per month, and your current investments show that you are committed to building wealth. However, let's dive deeper into your financial strategy to ensure you're on the right path.

Current Investments Overview
Mutual Fund Portfolio: You have accumulated Rs. 1.20 lakhs in mutual funds. This is a solid start, especially with a consistent SIP of Rs. 10,000 per month in small-cap funds. Small-cap funds have high growth potential but can also be volatile.

ULIP Plan: You've recently purchased a Max Life ULIP with a premium of Rs. 1.5 lakhs per year for five years. ULIPs combine insurance with investment, but they are not always the best choice for wealth creation.

Analyzing Your Small-Cap Investments
Small-cap funds can deliver high returns over time, but they come with high risk. They are more volatile than large or mid-cap funds. Since you are solely investing in small-cap funds, your portfolio may lack stability.

Consider Diversification: Instead of concentrating only on small-cap funds, diversify across large-cap, mid-cap, and balanced funds. This will reduce risk and provide a stable growth trajectory.

Benefits of Actively Managed Funds: Actively managed funds allow the fund manager to make decisions based on market conditions. This can lead to better returns, especially in volatile markets. Small-cap funds can benefit from active management, where fund managers can pick the best-performing stocks.

Evaluating Your ULIP Plan
ULIPs, like the one you’ve invested in, blend insurance and investment. However, ULIPs often have high charges, including premium allocation charges, policy administration charges, and fund management fees.

High Costs in ULIPs: These charges can eat into your returns, making ULIPs less efficient compared to pure investment options like mutual funds.

Limited Flexibility: ULIPs have a lock-in period, and exiting before the maturity can lead to penalties. Unlike mutual funds, where you can redeem units at any time, ULIPs restrict liquidity.

Recommendation: It might be better to focus on term insurance for protection and mutual funds for investment. If you need life insurance, a term plan offers high coverage at a low cost, while mutual funds can be used to build wealth.

Lack of Emergency Funds
Having no fixed deposits or bank balance means you have no liquidity in case of emergencies. This is a concern as it exposes you to financial risks if an unexpected expense arises.

Build an Emergency Fund: Aim to save at least 6-12 months’ worth of expenses in a liquid instrument, like a savings account or a liquid fund. This will ensure you are financially prepared for unforeseen events.
Need for Diversification
Your investments are currently focused on small-cap funds and a ULIP. This lacks diversification, which is key to managing risk.

Invest in Different Asset Classes: Consider adding large-cap and balanced funds to your portfolio. Large-cap funds offer stability, while balanced funds provide a mix of equity and debt, reducing overall risk.

Regular Mutual Funds vs. Direct Funds: While direct funds have lower expense ratios, they require a keen understanding of the market. Investing through a certified financial planner (CFP) with a mutual fund distributor (MFD) credential offers guidance and helps navigate the complexities of the market.

Importance of Term Insurance
Your ULIP serves as both an investment and insurance. However, the insurance coverage in ULIPs is usually not sufficient to cover your family's needs in case of any unfortunate event.

Switch to Term Insurance: Consider purchasing a term insurance policy. Term insurance provides a higher sum assured for a lower premium. It focuses purely on protection without any investment component.
Tax Efficiency
Your investments in mutual funds and ULIPs come with tax implications. ULIPs offer tax benefits under Section 80C, but the overall return might be lower due to high costs.

Mutual Funds and Tax: Equity mutual funds held for more than one year are taxed at 10% on gains above Rs. 1 lakh. This makes them a tax-efficient investment vehicle compared to other instruments.

ULIP Tax Implications: ULIP proceeds are tax-free under Section 10(10D), but the lower returns due to high charges might offset the tax benefits.

Setting Financial Goals
It's crucial to define your financial goals clearly. Without specific goals, your investments may not align with your long-term needs.

Short-Term Goals: For goals within the next 3-5 years, consider safer investments like debt mutual funds or fixed deposits once your emergency fund is in place.

Long-Term Goals: For long-term goals like retirement or children’s education, continue investing in equity mutual funds but with a diversified approach.

Regular Review of Portfolio
Your financial situation and goals might change over time. Regularly reviewing and rebalancing your portfolio is essential to ensure it stays aligned with your objectives.

Quarterly Reviews: Check the performance of your mutual funds every quarter. This helps you stay on track and make necessary adjustments.

Annual Rebalancing: Rebalance your portfolio annually. Shift from one fund to another if needed, based on performance and market outlook.

Final Insights
You are on the right track with your investments, but a few adjustments can improve your financial future. Diversify your portfolio, build an emergency fund, and consider switching from ULIP to a term insurance policy. Regularly review your investments and stay focused on your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You earn Rs. 84,000 per month.

You invest Rs. 20,000 per month in one mutual fund SIP. This has been ongoing for six years. Your total investment is Rs. 13,00,000, and the current corpus is Rs. 17,50,000.

You started another mutual fund SIP of Rs. 30,000 per month in 2024. You have invested Rs. 3,50,000, and the corpus is Rs. 3,80,000.

You invest Rs. 50,000 per year in NPS.

You invest Rs. 5,000 per month in Sukanya Samriddhi Account (SSA).

You invest Rs. 1,000 per month in PPF.

Your total corpus over the last six years is Rs. 25 lakh.

You hold Rs. 1 lakh in a liquid fund.

You have no loans or EMIs.

Your disciplined approach to investing is a positive step. You are creating long-term wealth and securing your financial future.

Strengths in Your Financial Plan
? Consistent Investments: You are investing 60% of your income in mutual funds and other instruments. This is a strong savings habit.

? Debt-Free Status: You have no EMIs or loans. This gives you financial flexibility.

? Diversified Portfolio: You invest in mutual funds, NPS, PPF, and SSA. This balance is good for risk management.

? Emergency Fund: You have Rs. 1 lakh in a liquid fund. This is helpful for unexpected expenses.

Areas of Improvement
1. Emergency Fund Needs Strengthening
Your emergency fund should be at least six months of expenses.

If your monthly expenses are Rs. 40,000, your emergency fund should be Rs. 2.4 lakh.

Increase your liquid fund to Rs. 2.5 lakh. You can add money gradually.

Keep it in a mix of savings accounts, fixed deposits, and liquid funds.

2. Optimising Mutual Fund Strategy
Your corpus in SIPs has grown, but the returns seem moderate.

The Rs. 20,000 SIP has a corpus of Rs. 17.5 lakh after six years. This suggests a moderate return.

Your Rs. 30,000 SIP started in 2024 has a small return so far.

Review your fund selection with a Certified Financial Planner.

Actively managed mutual funds help in wealth creation.

Continue SIPs but monitor performance regularly.

3. Retirement Planning Review
NPS is good for long-term retirement savings.

However, it has a lock-in period, and withdrawals have restrictions.

You should also build a separate mutual fund corpus for retirement.

Consider investing more in mutual funds for better liquidity.

Increase your PPF contributions if possible.

4. Child’s Education and Future Planning
SSA is a great step for your daughter’s education.

However, SSA has a long lock-in period.

Also, the returns are fixed and may not beat inflation.

Increase mutual fund investments to balance this.

Plan a dedicated education corpus in mutual funds.

This will give you flexibility when your children need funds.

5. Health and Life Insurance Check
You did not mention health insurance.

Ensure you have a good health policy for yourself and your family.

A Rs. 10-20 lakh floater health insurance policy is recommended.

If you have dependents, check if you need life insurance.

Term insurance is the best option for financial protection.

Optimising Tax Efficiency
Your PPF, SSA, and NPS contributions give tax benefits under Section 80C.

NPS also gives an additional Rs. 50,000 tax benefit under Section 80CCD(1B).

Review your tax-saving strategy for maximum benefits.

If you are in the new tax regime, some deductions may not apply.

Consult a tax expert to optimise your strategy.

How to Improve Your Wealth Creation Strategy
???? Increase your emergency fund to Rs. 2.5 lakh.

???? Continue SIPs, but review fund performance annually.

???? Increase investments for children’s education in mutual funds.

???? Consider increasing PPF contributions for stable returns.

???? Check your health and life insurance coverage.

???? Make sure your tax-saving investments align with your goals.

Final Insights
You are on the right track with disciplined investments.

However, some areas need improvement for long-term wealth creation.

Strengthen your emergency fund to avoid liquidity issues.

Review your mutual funds and optimise for better returns.

Build a strong education corpus for your kids in mutual funds.

Ensure proper health and life insurance coverage.

Keep monitoring your investments and stay updated on financial strategies.

With these improvements, you can achieve financial security and long-term wealth.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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