Should I invest in Equity or Debt?

Hello Sir, I have 3 queries First: With 30L corpus what is the ideal way of investing percentage wise in order to grow and save money without too much risk. in assets as follows: 1. FD 2. Mutual funds/ (stocks/coins if necessary just for beginning) 3. NPS Account 5. Emergency funds Second: Does ITR Filling and Income tax paying is same thing Third: NPS dashboard shows 41% XIRR with invested value as rs 1193.20 and holding amount as rs. 1202. Investment made in aug-24 and national/gain loss comes of just rs. 17/18. What does that means? Isn't it should be much more according to XIRR and return percentage? This is for tier 1 (all citizen model) with schemes chosen as equity as 74.90% and corporate bonds as 25.10%. Pls. suggest.

Ans: 1. First and foremost you must put aside 6-8 months of regular expense coverage into à liquid mutual fund. After doing this if you have some lumpsum left then you should invest it in NPS or equity savings fund (moderately high risk) depending on your financial goal priority viz retirement (NPS) or some other. If your time horizon is 10 years+ even for goals other then retirement, then you may think about investing in pure equity fund but that will have very high risk.

2. You are supposed to pay you income tax liability for financial year during the same year through Advance tax, TDS and also self income tax payment by 31st March. After that you have to furnish complete record of your entire income during previous FY to the tax authorities with exemptions, deductions if any vide IT returns before 31st July. After doing this exercise you assess how much tax you paid during the previous FY and how much tax you actually were liable to pay. If the difference is positive amount then income tax department will issue a refund with interest. Also if difference is negative the you have to pay the difference amount with interest to the income tax department. So return filing is basically comprehensive reconciliation statement of your previous FY income tax payments and additional tax overdue or refund if any.

3. NPS Returns given in the statements are based on inflows, gives the annualized effective compounded return rate in your account as per XIRR working. The calculation is done considering all the contributions/redemptions processed in your account since inception and the latest valuation of the investments. The transactions are sorted based on NAV date.

*Investments in mutual funds are subject to market risks. Please read all scheme related documents carefully before investing.

Happy Investing!!

Ans: Thank you for sharing the details of your financial situation and goals. It’s commendable that you have a clear vision for your retirement and are actively investing towards it. Let's review your current investments and create a robust plan to achieve your goal of retiring by 45 with a corpus of Rs 2 crores.

Current Financial Situation Analysis

At 31 years old, you have a monthly in-hand salary of Rs 1.5 lakhs. Your current investments are as follows:

Recurring Deposit (RD): Rs 30,000 per month
National Pension System (NPS): Rs 5,000 per month
Mutual Funds: Rs 16,500 per month
House EMI: Rs 20,000 per month
Fixed Deposits (FD): Rs 80,000 per month
Your goal is to retire by 45 with a corpus of Rs 2 crores. Let's evaluate and optimize your current investment strategy.

Evaluating Current Investments

Recurring Deposit (RD)

Recurring Deposits offer guaranteed returns but have lower interest rates compared to other investment options. While they are safe, they may not help you achieve your retirement corpus due to their lower growth potential.

National Pension System (NPS)

NPS is a good retirement savings option offering tax benefits and a mix of equity and debt exposure. However, NPS has restrictions on withdrawals before retirement and mandatory annuitization at maturity.

Mutual Funds

Investing Rs 16,500 per month in mutual funds is a good strategy. Mutual funds offer diversification and potential for higher returns. Evaluating the types of mutual funds you’re investing in (equity, debt, hybrid) will help ensure proper asset allocation.

House EMI

Your house EMI of Rs 20,000 per month is a fixed commitment. While this is not an investment, it's part of your financial planning and impacts your cash flow.

Fixed Deposits (FD)

Allocating Rs 80,000 per month to fixed deposits is significant. FDs offer safety but low returns. They may not be the best option for long-term wealth creation due to their low interest rates compared to inflation.

Setting Up a Robust Financial Plan

1. Setting Clear Financial Goals

Retirement Corpus

Your goal is to accumulate Rs 2 crores by the age of 45. This requires a strategic approach to investing with a focus on growth while managing risks.

Emergency Fund

Maintain an emergency fund to cover at least 6 months of expenses. This ensures financial stability during unexpected situations.

2. Optimizing Your Investment Portfolio

Recurring Deposit Adjustment

Consider reducing your monthly RD contributions. Redirect these funds to higher-return investments like mutual funds. While RDs are safe, their low returns may not help you reach your retirement goal efficiently.

Increasing Mutual Fund Investments

Increasing your mutual fund investments will enhance your portfolio’s growth potential. Investing in equity mutual funds can provide higher returns over the long term. Diversify your mutual fund investments across different categories (large cap, mid cap, small cap, and hybrid funds).

Evaluating NPS Contributions

NPS is a good option for retirement savings due to its tax benefits and mix of equity and debt. Continue your NPS contributions but consider increasing them if possible. The equity exposure in NPS can help in achieving higher returns.

Reducing Fixed Deposit Allocations

Fixed deposits are safe but offer lower returns. Reduce your FD contributions and redirect these funds to mutual funds or other high-return investment options. This will enhance your portfolio’s growth potential.

Investment Allocation Strategy

Here’s a suggested investment allocation based on your monthly budget:

Equity Mutual Funds: Rs 50,000 (Higher growth potential but higher risk)
Debt Mutual Funds: Rs 10,000 (Stability and lower risk)
NPS: Rs 10,000 (Retirement savings with tax benefits)
Emergency Fund: Rs 10,000 (Until you reach the target amount)
3. Calculating Required Monthly Savings

To achieve your goal of Rs 2 crores in 14 years, let’s calculate the required monthly savings assuming an average annual return of 12% from your investments.

You need to invest approximately Rs 58,772 per month to achieve your goal of Rs 2 crores in 14 years with an annual return of 12%.

4. Strategic Asset Allocation

To achieve a balanced portfolio, diversify your investments across different asset classes:

Equity Mutual Funds

Allocate a significant portion to equity mutual funds for higher growth. Diversify across large cap, mid cap, and small cap funds. Actively managed funds offer potential for higher returns compared to index funds.

Debt Mutual Funds

Invest in debt mutual funds for stability and lower risk. These funds provide regular income and preserve capital.

National Pension System (NPS)

Continue and potentially increase your NPS contributions. NPS offers a balanced mix of equity and debt, which is beneficial for long-term retirement planning.

Emergency Fund

Maintain a separate emergency fund to cover unforeseen expenses. Aim for 6-12 months of expenses in a liquid, easily accessible account.

5. Regular Review and Rebalancing

Financial planning is an ongoing process. Regularly review your portfolio’s performance and make necessary adjustments. Market conditions and personal goals may change, requiring rebalancing of your investments.

Professional Guidance

Consulting with a Certified Financial Planner (CFP) will provide you with personalized advice and professional management of your investments. A CFP can help in selecting the right funds, monitoring performance, and making strategic adjustments.

Empathy and Understanding

It's understandable that managing finances can be challenging, especially with long-term goals. Your dedication to securing your financial future is commendable. Taking proactive steps and seeking professional advice will help you achieve your goals efficiently.

Final Insights

Your commitment to achieving a retirement corpus of Rs 2 crores by 45 is ambitious yet achievable. By optimizing your current investments, increasing mutual fund allocations, and maintaining regular contributions, you can reach your goal.

Remember, financial planning is a dynamic process that requires regular monitoring and adjustments. Stay focused, consult with a Certified Financial Planner, and keep your long-term goals in mind. With a strategic approach and disciplined investing, you’ll achieve financial freedom and security.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in