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68-Year-Old Investor Asks: Is It Wise to Use Equity as Collateral for Apartment Construction?

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 02, 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 - Aug 02, 2024Hindi
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Date: 02.08.2024 Dear Sir I am 68 yrs old. I have invested 40L in various equities since last 44 years & 50L in Equity based M/F’s since last 14 years. Current market value is around 1.8cr & 1.6cr respectively & it may grow by 20% CAGR. As per my assumptions in the next 7 years of period total market value will be around 10cr approx. Also I have a land property valued 3cr. Now I am planning to build 6 floor residential apartments on it. For this I need a fund around 2cr for construction & I am planning to raise funds from overdraft loans against my Equity shares & M/F at the rate 10.35%.approx I do not have any other source to raise the reqd. fund and I do not have any other liabilities. I am planning SWP of Rs. 10 lacs every year to repay interest on OD. Further I may sell out one floor to clear my overdraft loans after full construction. Are my thoughts correct in your opinion? I need your practical advice & guidance in this regard please. Thanks & Regards

Ans: Current Financial Situation

You have a strong investment portfolio worth Rs. 3.4 crore.
Your equity investments have grown well over 44 years.
Mutual fund investments also show good growth in 14 years.
You own a valuable land property worth Rs. 3 crore.

Proposed Plan

You want to build a 6-floor residential apartment.
You need Rs. 2 crore for construction costs.
Planning to take overdraft loans against equity and mutual funds.
Intend to repay interest through SWP of Rs. 10 lakh yearly.
Plan to sell one floor to clear overdraft loans.

Risks to Consider

Construction costs may exceed your estimates.
Market volatility could affect your investment values.
Interest rates on overdraft loans may increase.
Property market conditions may change.

Alternative Funding Options

Consider selling some equity or mutual fund units.
This could reduce your loan burden and interest costs.
Look into construction loans from banks.
They may offer better interest rates than overdraft loans.

Tax Implications

Selling investments may lead to capital gains tax.
Property sale will also have tax implications.
Plan for these taxes in your financial calculations.

Cash Flow Management

Ensure you have enough regular income for daily expenses.
Don't rely solely on investments for living costs.
Keep some funds aside for emergencies.

Investment Portfolio Review

Your portfolio has performed well over the years.
Consider rebalancing to maintain proper asset allocation.
Actively managed funds can help navigate market changes.

Construction Project Management

Get detailed cost estimates from reliable contractors.
Factor in potential delays and cost overruns.
Consider hiring a project manager to oversee construction.

Exit Strategy

Have a clear plan for selling or renting the apartments.
Research local property market trends.
Be prepared for possible delays in property sale.

Retirement Planning

Ensure this project doesn't jeopardize your retirement savings.
Keep a portion of your investments untouched for future needs.
Regular funds through CFP can provide ongoing guidance.

Finally

Your plan has potential but carries significant risks.
Consider less risky alternatives to achieve your goals.
Consult a Certified Financial Planner for personalized advice.
Regular review of your financial situation is crucial.

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.
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Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 19, 2024

Asked by Anonymous - Jun 10, 2024Hindi
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Hi..I am 49 years old I have Stocks of Rs.1.40 Crores, PPF Rs. 20 Lakhs, EPF Rs.25 Lakhs, Rs 20 Lakhs in SGV and Mutual Fund., Real Estate of Rs.55 Lakhs Purchase value with a loan of Rs.24 Lakhs outstanding. I want to purchase a house of Rs.1.60 Crore. Monthly avilable to investment 1.5 lakhs Job is at stake now..Should I purchase the house for staying AT 58 YEARS if job is not yhere in 8 months down the line. Also if I purchase the 2nd house for staying, should I sell the first house which I can get Rs.35 to Rs.40 lalhs after paying my loan and pay for 2nd house or invest in mutual fud and withdraw from the corpus. Secondly. Should I sell part of my stock to pay part of my 2nd house purchase or keep the sale proceeds in Mutual fund and then do a sWP and pay the 2nd house. Thirdly, Stocks I have got about 15 to 10 percent returns in last 2 years Should I keep the complete stock or take out 40 or 50 percent and invest in Mid cap and small cap mutual funds? Fourth If you want to invest 50 lakhs in Small and Mid cap funds..Is it better to go for 4 funds (2 in each category )or 2 funds ( one is each category)
Ans: Current Financial Situation
Assets
Stocks: Rs 1.40 crores
PPF: Rs 20 lakhs
EPF: Rs 25 lakhs
SGBs: Rs 20 lakhs
Mutual Funds: Rs 20 lakhs
Real Estate: Rs 55 lakhs (purchase value) with an outstanding loan of Rs 24 lakhs
Income and Investment Capacity
Monthly Available for Investment: Rs 1.5 lakhs
Job Security: At risk, with potential job loss in 8 months
Goals and Questions
Purchasing a House for Rs 1.60 Crores
You plan to buy a second house for Rs 1.60 crores. You are considering selling your current house and using the proceeds, along with your investments, to fund the purchase.

Key Questions
Should I purchase the house for staying at 58 years if job is not secure?
Should I sell the first house and use the proceeds for the second house, or invest in mutual funds and withdraw from the corpus?
Should I sell part of my stocks to pay for the second house, or keep the proceeds in mutual funds and use SWP?
Should I move some stock investments to mid-cap and small-cap mutual funds?
Is it better to invest Rs 50 lakhs in small and mid-cap funds across 2 or 4 funds?
Detailed Analysis
Purchasing the House
Job Security and Financial Stability
Given the potential job loss, ensure financial stability first. Buying a house worth Rs 1.60 crores may strain your finances if your job is at risk.

Using Proceeds from the First House
Selling the First House
Proceeds: Selling the first house can get you Rs 35-40 lakhs after paying off the loan. This can be used towards the purchase of the second house.
Investing in Mutual Funds
Investing Proceeds: If you invest the proceeds in mutual funds, you can withdraw through a Systematic Withdrawal Plan (SWP) to fund the second house. This approach can offer better returns compared to keeping the funds idle.
Selling Stocks for the Second House
Selling Stocks
Partial Sale: Consider selling part of your stock portfolio. This can provide liquidity for the house purchase. However, do not liquidate all stocks, as they offer growth potential.
Investing in Mutual Funds
SWP Strategy: Transfer the sale proceeds to mutual funds and use an SWP for steady payments towards the house. This offers tax efficiency and better returns.
Stock Portfolio Adjustment
Current Returns
Returns: Your stocks have given 10-15% returns over the last two years. This is a decent performance.
Diversifying to Mutual Funds
Reallocation: Moving 40-50% of your stock investments to mid-cap and small-cap mutual funds can diversify your risk and offer higher growth potential.
Investment in Mid-Cap and Small-Cap Funds
Number of Funds
4 Funds Approach: Invest Rs 50 lakhs across 4 funds (2 in mid-cap and 2 in small-cap). This diversifies your risk and provides exposure to different fund management styles.
Recommendations
Prioritise Financial Stability
Ensure you have enough liquidity and emergency funds, given your job risk.
Avoid making large financial commitments like purchasing a new house if job security is uncertain.
Using First House Proceeds
Sell your first house and use the proceeds towards the second house.
If not buying immediately, invest the proceeds in mutual funds and use SWP for payments.
Managing Stock Investments
Sell a portion of your stocks to generate liquidity.
Reinvest in mutual funds, especially mid-cap and small-cap, for better diversification and potential returns.
Mutual Fund Strategy
Invest Rs 50 lakhs in 4 funds (2 mid-cap, 2 small-cap) for balanced diversification.
Ensure the funds are actively managed for better performance.
Final Insights
Maintain financial stability given your job situation. Diversify your investments to reduce risk. Prioritise liquidity and ensure you have enough funds to cover potential job loss. Consider professional advice for a tailored strategy.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 28, 2024

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Dear Sir, I am 35 years old and starting a SIP in mutual funds from next month with a monthly investment of ?50,000. I have selected the following funds and allocated the amount accordingly: Tata Small Cap Fund Direct Growth – ?5,000/month Quant Mid Cap Fund Direct Growth – ?15,000/month Motilal Oswal Large and Midcap Fund Direct Growth – ?20,000/month DSP ELSS Tax Saver Direct Plan Growth – ?10,000/month My primary goal is to accumulate approx ?1.5 crore by the 7th year to build a villa. Could you please review my selection and allocation? I would appreciate your suggestions on any modifications or alternative funds to help achieve my target. Looking forward to your valuable advice. Thank you.
Ans: At 35 years, starting a Rs 50,000 SIP monthly is a disciplined approach. Your goal of Rs 1.5 crore in seven years is ambitious, and the current allocation choices are strong. However, let’s assess each fund’s contribution to your goal, while ensuring efficient returns and optimal portfolio balance. I’ll review each selection and suggest potential adjustments to help achieve your villa investment target.

Overview of Your Portfolio and Allocation
In your current allocation, you’ve chosen a mix of large and mid-cap, mid-cap, small-cap, and ELSS (tax-saving) funds. This approach brings some diversification across market caps and adds a tax-saving benefit. Here’s a detailed assessment of each category and its suitability for your goals.

Large and Mid-Cap Allocation
Fund Selected: Rs 20,000 in a large and mid-cap fund

Role in Portfolio: Large and mid-cap funds combine stability from large-cap stocks and growth from mid-caps.

Evaluation: This allocation gives a good balance between risk and reward and is essential for high growth potential.

Suggested Action: Continue with this allocation. However, investing through a regular plan with a trusted MFD and a Certified Financial Planner may offer additional guidance and ongoing support, especially as market conditions fluctuate.

Mid-Cap Allocation
Fund Selected: Rs 15,000 in a mid-cap fund

Role in Portfolio: Mid-cap funds provide growth with moderate risk and are ideal for a seven-year horizon.

Evaluation: This allocation supports your target by capturing the growth potential in mid-sized companies.

Suggested Action: Retain this mid-cap exposure but consider moving to a regular fund plan. Direct funds, though low-cost, lack the personalized insights an MFD can provide, especially during market volatility. A Certified Financial Planner with the right credentials can add value here.

Small-Cap Allocation
Fund Selected: Rs 5,000 in a small-cap fund
Role in Portfolio: Small-cap funds offer high growth but are the most volatile.
Evaluation: While these funds can deliver excellent returns, they are sensitive to market changes and may need longer timeframes to stabilise.
Suggested Action: Retain this allocation but be mindful of its volatility. Monitoring its performance closely is essential, as small caps are riskier over shorter periods. If you prefer lower volatility, consider reallocating part of this amount to large-cap funds.
ELSS (Equity-Linked Savings Scheme)
Fund Selected: Rs 10,000 in ELSS

Role in Portfolio: ELSS funds provide tax savings and equity exposure. They come with a three-year lock-in period.

Evaluation: Tax-saving funds are beneficial if you are looking to reduce your taxable income. Additionally, they offer equity exposure, which aligns with your growth objectives.

Suggested Action: Retain this allocation if tax savings are needed. However, if you don’t need the tax-saving benefit, consider allocating this amount to either the large and mid-cap or mid-cap fund. Diversifying within growth-oriented funds could offer better liquidity and flexibility.

Tax Considerations for Mutual Funds
Understanding the tax implications will help in long-term planning and portfolio returns.

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

Debt Mutual Funds: LTCG and STCG taxes align with your income tax slab.

Tax-Saving Tips: Plan withdrawals in stages to reduce capital gains taxes. A Certified Financial Planner can assist in setting up tax-efficient withdrawal plans.

Suggested Rebalancing for Your Investment Goals
To accumulate Rs 1.5 crore within seven years, your portfolio should aim for a balance of growth and risk management.

Large and Mid-Cap Allocation: Increase allocation if possible, as these funds offer growth with moderate stability. Raising this allocation to Rs 25,000 could add to portfolio stability and meet growth objectives.

Mid-Cap Allocation: Keep this allocation but review periodically. Mid-cap exposure works well for growth but should not exceed 30-40% of the portfolio for risk balance.

Small-Cap Fund: Maintain but monitor. Since small caps are volatile, it’s wise to review every six months. If you’re uncomfortable with high volatility, consider reallocating some of this amount to large or mid-cap funds.

ELSS Fund: Retain if tax benefits are needed. However, if tax savings are not required, allocate this to the large and mid-cap or mid-cap fund for better liquidity and growth balance.

Disadvantages of Direct Funds and Benefits of Investing Through Regular Funds
Limited Guidance: Direct funds lack ongoing advisory support. Regular plans through a Certified Financial Planner give you consistent insights.

Market Volatility: During market corrections, direct investors may miss out on vital guidance. A CFP-led approach in regular plans helps manage emotional decisions effectively.

Comprehensive Monitoring: CFPs provide tailored advice that aligns with your life goals and risk tolerance, enhancing returns while reducing risk.

Building a Plan for Reaching Rs 1.5 Crore Goal
For a seven-year horizon, aiming for Rs 1.5 crore is possible with disciplined investing and regular monitoring. Here are strategies to strengthen your investment journey:

Regular Reviews: Plan bi-annual portfolio reviews to assess fund performance and rebalance if required.

Disciplined SIPs: Continue your SIPs with commitment. Consistency is crucial for compounding benefits.

Emergency Fund: Keep three to six months of expenses in an emergency fund to avoid breaking investments in unforeseen situations.

Goal-Based Withdrawal Planning: Towards the goal date, begin partial withdrawals systematically. This avoids sudden large redemptions, maintaining returns.

Final Insights
Your SIP investment structure is thoughtfully planned, aligning with your goal of Rs 1.5 crore. By considering minor adjustments, you can enhance growth, manage risk, and ensure steady progress towards your target.

Sticking to actively managed funds through an MFD with CFP credentials brings better performance tracking and valuable guidance. A Certified Financial Planner can support you in tax-efficient planning and provide guidance tailored to your unique goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

..Read more

Latest Questions
T S Khurana

T S Khurana   |197 Answers  |Ask -

Tax Expert - Answered on Nov 23, 2024

Asked by Anonymous - May 11, 2024Hindi
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Can you please suggest on capital gains as per Indian taxation laws arising in the below two queries : 1) property purchased with joint ownership, me and my wife’s name in 2015 at a cost of 64,80,000, housing improvements done for the cost of 1000000 and brokerages of 200000 paid and sold the same property at 10000000 in Dec 2023? 2) 87% of the proceeds got from the deal i.e 8700000, have been reinvested to pay 25% amount in purchasing another joint ownership property in Dec 2023, 3) I have invested in another under construction property in Nov 2023 by taking housing loan, which is on me and my wife’s name worth 1.4 cr, here the primary applicant is me only while wife is just made a Co applicant in the builder buyer agreement and also on the housing loan . So what are the LTCG tax liabilities arising from the above 3 scenarios for FY 2023-2024 and FY 2024-2025. I intend to sale off the property acquired in (2) by Dec 2024 and use that proceeds to close the housing loan for the property acquired in (3), will this sale of property be inviting any tax liabilities if the complete proceeds received from the sale of the property in (2) would be utilised to close the housing loan taken in Nov 2023 for the property in (3) ? Since in FY 23-24, I would be claiming the LTCG from the sale proceeds of 1) invested in the purchase of property in 2), and I intend to sale off this property in Dec 2024, will the LTCG claim be forfeited on the property sale in (1), should I hold this property at least for further 1 year so that sale of this property in 2) will not invite STCG?
Ans: (A). Let's first talk about F/Y 2023-24 :
You jointly sold a Property during the year for Rs.76.80 lakhs (64.80+10.00+2.00), & sold the same for Rs.100.00 lakhs.
You have jointly also purchased Property No.3 (I suppose it is Residential only), for Rs.140.00 lakhs.
You should avail exemption u/s-54 & file your ITR accordingly. Please disclose all details about sale & purchase in your ITR.
02. Now coming to the F/Y 2024-25 :
You intend to Sell Property No.2, which was acquired in 2023-24. Any Gain on Sale of it would be Short Term capital Gains & taxed accordingly.
Alternatively, you may hold this sale of property no.2 (for 2 years from its purchase) & avoid STCG
You are free to utilize the sale proceeds in a way you like, including paying off your housing Loan.
Please note to avail exemption u/s 54 only from investment in property no.3 & not 2.
Most welcome for any further clarifications. Thanks.

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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