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Should 42-year-old with 2 flats and 70L in MF buy 3rd flat using all MF?

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 12, 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
Money

Hello , I am 42 years old, I am owning 2 flats 2bhk and 2.5bhk, I have 70Lacs in mutual funds and 40 Lacs in pf and Loan rs 40 lacs. In my building resale flat is coming to sell worth rs 85L. Is it worth to buy third flat by putting all Mutual fund money?

Ans: Your interest in expanding your real estate portfolio demonstrates a strong awareness of investment opportunities. However, purchasing a third flat using your mutual fund investments requires careful consideration of the potential impact on your overall financial health. Let’s explore the implications in detail.

Current Financial Situation
Asset Overview:
You currently own two residential flats, a significant investment in real estate. Additionally, you have Rs. 70 lakhs in mutual funds and Rs. 40 lakhs in your provident fund. You also have a Rs. 40 lakh home loan, which is an ongoing liability.

Diversified Portfolio:
Your assets are spread across different investment classes—real estate, mutual funds, and provident fund. This diversification is vital in managing risk and ensuring that you have a balanced approach to wealth creation.

Evaluating the Impact of Liquidating Mutual Funds
Risk of Over-Concentration:
If you decide to liquidate your mutual funds to purchase the third flat, it will significantly increase your exposure to real estate. While property can appreciate over time, having too much of your wealth tied up in one asset class could expose you to higher risks, particularly in a fluctuating real estate market.

Loss of Liquidity:
Mutual funds, especially equity mutual funds, offer the advantage of liquidity. You can easily access your funds in times of need, which provides financial flexibility. Real estate, on the other hand, is an illiquid asset. Selling a property takes time and might not fetch the desired price, especially in a market downturn.

Opportunity Cost:
By using all your mutual fund money to buy another flat, you may miss out on potential market gains. Mutual funds, particularly those invested in equities, have historically provided higher returns over the long term. This could be a missed opportunity for wealth accumulation, especially if the real estate market underperforms.

Considering the Existing Loan
Financial Burden:
You currently have a Rs. 40 lakh loan. Adding another property by liquidating mutual funds might increase your financial obligations. Even if you manage to avoid taking a new loan, the pressure to maintain cash flow for property-related expenses (like maintenance, taxes, and potential renovation) could strain your finances.

Debt Management:
It’s essential to consider how the existing loan and potential expenses on a new property will affect your long-term financial goals. Increasing your liabilities might limit your ability to invest in other asset classes that offer growth potential and liquidity.

Real Estate vs. Mutual Funds
Concentration Risk:
Owning three flats means a large portion of your wealth is concentrated in real estate. This increases your exposure to risks like market downturns, changes in property laws, and other uncertainties. Diversification across asset classes helps in managing these risks better.

Maintenance and Costs:
Real estate investments come with ongoing costs such as maintenance, property taxes, and potential repairs. These expenses can eat into your rental income and overall return on investment. Unlike mutual funds, where the cost of investment is relatively low and predictable, property-related costs can be variable and sometimes unexpected.

Growth Potential:
Mutual funds, especially equity-oriented ones, have a track record of delivering higher returns over the long term. These returns come with market-linked risks, but the potential for growth is significantly higher compared to real estate. Additionally, the power of compounding in mutual funds can help in wealth creation over time, something that real estate investments may not offer to the same extent.

Alternative Strategy
Balanced Investment Approach:
Instead of fully liquidating your mutual funds, consider maintaining a diversified portfolio. A balanced approach could involve keeping a portion of your mutual fund investments while exploring partial financing options if you are keen on purchasing the third flat. This allows you to retain some liquidity and potential for growth.

Debt Fund Investments:
If you prefer low-risk investments, consider allocating some funds to debt mutual funds or bonds. These options offer steady returns with lower risk and can be an alternative to putting all your money into another property. Debt funds also offer better liquidity compared to real estate.

Enhanced Mutual Fund Portfolio:
If the primary concern is to optimize returns, you could consider enhancing your mutual fund portfolio by increasing your investment in equity funds or diversifying into balanced funds. These options provide a mix of growth and stability, aligning with your long-term financial goals.

Leveraging Current Assets:
You could explore leveraging your current assets, like taking a loan against your mutual funds or provident fund, to finance part of the property purchase. This way, you retain ownership of your mutual fund investments while acquiring the new property.

Final Insights
Buying a third flat by liquidating your mutual funds is a significant financial decision that could alter your overall financial landscape. While real estate has its benefits, the concentration of wealth in one asset class and the potential loss of liquidity and growth opportunities should be carefully weighed. A more balanced approach—retaining investments in mutual funds while exploring other options—could provide greater financial security and flexibility. Consulting a Certified Financial Planner (CFP) will further help in aligning your investment strategy with your long-term financial goals.

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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I'm 32 unmarried and earn 4 lakhs per month post tax. My current MF portfolio is 90lakhs. With 20- 25% IRR and pay 50k for rent and 25k for expenses. want to know if should buy a flat worth 2 CR buy doing 50% down payment or should continue paying rent and invest n MF? If I continue with MF investment then when should be right period or financial situation to buy flat worth 2cr in future. PS: I don't see owning an home as an emotional attachnment.
Ans: Evaluating the Decision to Buy a Flat vs. Continue Investing in Mutual Funds
Understanding Your Financial Situation
As a 32-year-old earning 4 lakhs per month post-tax with a substantial MF portfolio of 90 lakhs, you're in a strong financial position. With disciplined spending, paying 50k for rent and 25k for expenses reflects prudent financial management.

Assessing the Rent vs. Buy Dilemma
Considering your high income and investment prowess, the decision to buy a flat worth 2 crores with a 50% down payment warrants careful consideration. Evaluating the financial implications of home ownership versus continued MF investing is essential.

Analyzing Financial Impact
Purchasing a 2 crore flat with a 50% down payment entails significant capital outlay and ties up funds that could otherwise be invested in MFs. Assess the opportunity cost of this decision, factoring in potential returns from MF investments versus home ownership.

Evaluating Long-Term Goals
Given your aversion to emotional attachment to homeownership, prioritize your long-term financial goals and investment objectives. Determine if the potential benefits of home ownership, such as asset diversification and stability, outweigh the opportunity cost of foregone investment returns.

Timing Considerations
Consider the timing of your decision to buy a flat in relation to your financial situation and market conditions. Monitor real estate trends, interest rates, and your MF portfolio performance to identify opportune moments for property acquisition.

Seeking Professional Advice
Consulting with a Certified Financial Planner (CFP) can provide valuable insights and personalized recommendations tailored to your financial objectives. A CFP can help you weigh the pros and cons of buying a flat versus continuing MF investments and devise a strategic plan aligned with your goals.

Conclusion
The decision to buy a flat or continue investing in MFs depends on various factors, including your financial goals, risk tolerance, and market conditions. By carefully evaluating the financial implications and seeking professional guidance, you can make an informed decision that aligns with your long-term financial objectives.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

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Milind Vadjikar  |682 Answers  |Ask -

Insurance, Stocks, MF, PF Expert - Answered on Sep 18, 2024

Asked by Anonymous - Sep 17, 2024Hindi
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Hi , I am 45 yr old, two daughters aged 13,10. My asset are a flat worth 1.75 cr, stocks ,85lacs, PPF- 20lacs, PF 40 lacs, MF -5 lacs, and my has a investment of 15 lacs in equity and 10 lacs in MF. We own two parcels of land worth 75 lacs. We don't have any loans and we take home 3.75 lacs. I am moving to tier 2 city, and moving to a rental property. My flat is 20 yr old and it has reached its full value depending on the area. I want to sell my flat and invest the proceedings into MF for a period of 4-5 yrs before buying a house in tier 2 city. Is it advisable to sell it. The flat is tier 1 city and I don't live inthat city
Ans: I propose that you estimate the long term(assumed) capital gain tax liability that may arise after sale of this flat considering indexation or without indexation as is optimal for you. Next consider the future redevelopment potential in the tier-1 city particularly in the area where you have the flat. Another point to be borne in mind is if your daughters need to move to tier-1 city in future for better coaching, education, prospects then this aspect needs to be considered. If you still want to sell the flat then time it in such a way when you want to buy new residential property in tier2 city because you can utilise all your gains here without paying any capital gain tax(Section 54 of Income tax act allows exemption subject to conditions) and/or buying section 54 EC Capital Gain bonds to save LTCG payment(50L per FY limit & 6 months within sale of property subject to eligibility).

Unless you have strong knowledge of markets or an investment advisor to assist you, I would recommend you to redeem your(family) stock holdings(subject to high volatility and needs regular monitoring) of 85L+15L and invest it in a staggered manner into equity savings and value focussed balanced advantage fund for horizon of 4-5 years.

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

You may follow us on X at @mars_invest for updates

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I understand your concerns. The first step is to focus on moving on; she has, and you should too. Prioritize your career, your family, and your future. Next, what has happened to your career progress has already happened. It's unfortunate, but there's no way to change that. But give yourself a second chance; work harder and achieve greater things than you even imagined before. Trust me, you are not the only person who is standing in a situation like this. Many have, and many more will. But the ones who have passed this time will give you the same advice that I did.

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Asked by Anonymous - Nov 13, 2024Hindi
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Sir, I am 40yrs old. Having monthly takehome salary of 1.1 lakh and rental income of 36000. My investment are 2 flats worth of 1cr. 4 plots in Bhubaneswar worth of 2crs. EPF balance 50 lakh, LIC policies worth of 16 lakhs, NPS worth of 10 lakhs. My monthly saving commitments are - EPF (employee+employer) 28000 NPS 15000 MF 7500 Gold scheme 5000 Financial burden - HL emi of 24000 Monthly expanses 50000 I would like to retire at 50. Please advise for retirement plan with life expectancy of 80yrs.
Ans: Hello;

The value of your investments after 10 years;

A. EPF Corpus+Contribution: 1.6 Cr
B. NPS Corpus+Contribution: 53 L
C. MF(sip) + Gold(sip): 25 L
D. Real estate (land): 3.26 Cr

So sum of A, C & D gives us a corpus of 5.11 Cr

Since you will withdraw NPS before 60 age 80% of corpus will go into annuity while 20% will be available to you.

So you may expect monthly income of around 21 K from annuity(42.4 L).

Balance 10.6 L get added to 5.11L taking your total corpus to ~ 5.2 Cr.

If you invest 5 Cr in a conservative hybrid debt fund and do a SWP at the rate of 3%, you may expect a monthly income of around 1.1 L(post-tax).

Add your monthly rental income of 36 K(No growth factored) and annuity income of 21 K to this and you have total monthly income of 1.67 L after 10 years.

Your current monthly expenses of 50 K after 10 years would be around 90 K and 1.6 L after 20 years.

Considering return of around 7-7.5% from the conservative hybrid debt fund you will still generate inflation adjusted return at 3% SWP after 80 years of age.

Assumptions:
Inflation rate-6%
Return from EPF-8%
Return from NPS-9%
Return from MF-10%
Return from gold-7%
Return from Land-5%
Annuity rate-6%

The spare flat is not considered in this because it will continue to yield you rental income in retirement.

Since real estate(land) returns may fluctuate over 10 years suggest to increase MF sip(6X) as a back-up, also in this case you may decide to retain & invest in NPS upto 60 age.

Of course MF returns are also not assured but you are improving the odds by backing two appreciable assets(RE & equity) over long-term.

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Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 22, 2024

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My age 62, male, getting rental income Rs. 90k nett. Already subscribing 12.5k in PPF for the past 2 1/2 years. No other investments. My target is 5 crores in 10 years. I already have Mediclaim Rs.50 lakhs for me & wife . Please advice me what to do.
Ans: Your current financial foundation is strong and shows promise:

A rental income of Rs. 90,000 per month provides consistent and predictable cash flow. This stability can serve as the backbone for your investment strategy.

PPF contributions of Rs. 12,500 per month for 2.5 years reflect disciplined saving. However, its returns may be insufficient to achieve a high-growth target like Rs. 5 crores in 10 years.

A robust Mediclaim policy of Rs. 50 lakhs for you and your wife ensures adequate health coverage. This safeguard allows you to focus on wealth-building without worrying about medical emergencies.

Despite these positive factors, achieving Rs. 5 crores in 10 years requires a carefully crafted and growth-oriented strategy.

Defining and Prioritising Your Financial Goals
Achieving Rs. 5 crores is ambitious yet achievable with a focused approach:

Define this target as your primary financial goal over the next decade.

Break it into manageable milestones: for example, Rs. 50 lakhs every 1-2 years in cumulative investments and growth.

Prioritise high-return investments that align with your risk tolerance and financial capacity.

Optimising Existing PPF Contributions
While PPF is a secure investment, its growth potential is limited:

Returns: PPF currently offers an interest rate of approximately 7-7.5%, which barely outpaces inflation.

Contribution Review: Consider capping your PPF contributions at Rs. 1.5 lakh annually (to utilise the Section 80C benefit). This ensures that excess funds are redirected to higher-return investments.

PPF can serve as a low-risk component of your portfolio but should not dominate your investment strategy.

Building a Diversified Investment Portfolio
A diversified portfolio will provide a balance of risk and reward. Include the following components:

1. Equity Mutual Funds for Growth
Equity mutual funds are essential for achieving high returns over the long term:

Large-Cap Funds: These invest in established companies and offer stability with moderate growth. They are ideal for a portion of your portfolio to reduce risk.

Multi-Cap or Flexi-Cap Funds: These provide exposure to companies of all sizes, offering growth and diversification.

Sectoral and Thematic Funds: Avoid these unless you have a high risk tolerance and understand market dynamics.

ELSS Funds: These not only provide tax savings under Section 80C but also deliver market-linked returns.

Why Avoid Index Funds?

Index funds may offer simplicity and lower expense ratios, but they lack flexibility. They cannot adapt to market conditions or capitalise on outperforming sectors. Actively managed funds, on the other hand, have the potential to outperform the market, especially in a developing economy like India.

Start with a Systematic Investment Plan (SIP) in selected funds to build wealth steadily.

2. Debt Mutual Funds for Stability
Debt funds add stability to your portfolio and reduce overall risk:

Choose funds with low credit risk and moderate duration to ensure safety and predictable returns.

Debt funds are suitable for short- to medium-term goals or as a fallback during market corrections.

Taxation Note: Both LTCG and STCG on debt funds are taxed as per your income tax slab. This should be factored into your planning.

3. Balanced Advantage Funds
Balanced advantage funds (BAFs) dynamically allocate assets between equity and debt. They:

Provide exposure to equity while minimising downside risk.

Offer a suitable option for someone nearing retirement but seeking growth.

4. Gold Investments for Diversification
Allocate a small portion (5-10%) of your portfolio to gold:

Gold serves as a hedge against inflation and currency depreciation.

Choose gold ETFs or sovereign gold bonds for ease of liquidity and better returns.

Emergency Fund Creation
Having an emergency fund is non-negotiable:

Maintain at least 6-12 months of expenses in liquid investments like liquid mutual funds or high-interest savings accounts.

This ensures liquidity for unforeseen events without disturbing your long-term investments.

Focus on Retirement Planning
At 62, balancing growth and safety becomes critical:

Estimate your monthly retirement expenses, considering inflation over the next 10-15 years.

Your target of Rs. 5 crores should primarily serve as your retirement corpus.

Allocate assets thoughtfully:

60-70% in equity funds for growth.
30-40% in debt funds for stability.
Periodically rebalance your portfolio to maintain this allocation.

Strategic Tax Planning
Tax efficiency can significantly impact your returns:

Continue using Section 80C to its full potential, including ELSS funds and PPF.

Consider the National Pension System (NPS) for an additional Rs. 50,000 deduction under Section 80CCD(1B).

Be mindful of the new taxation rules for mutual funds:

Equity Mutual Funds: LTCG above Rs. 1.25 lakh is taxed at 12.5%; STCG at 20%.
Debt Funds: LTCG and STCG are taxed as per your income slab.
Consult a Certified Financial Planner to optimise your tax strategy.

Regular Portfolio Monitoring and Rebalancing
Investing is not a one-time activity:

Review your portfolio every six months or annually to track performance.

Rebalance your asset allocation periodically to align with your financial goals and risk appetite.

Stay committed to SIPs even during market downturns, as this ensures cost-averaging.

Additional Suggestions
Avoid Over-Reliance on PPF
While PPF is safe, it is not sufficient for wealth creation. Shift excess contributions to equity-based investments for better returns.

Avoid Direct Stocks
Direct equity investing requires time, expertise, and constant monitoring. It carries higher risk and may lead to losses without proper research. Instead, rely on equity mutual funds managed by professionals.

Avoid Mixing Insurance and Investments
Do not invest in ULIPs or endowment plans, as they offer suboptimal returns. Stick to pure insurance products for protection and mutual funds for growth.

The Role of a Certified Financial Planner
To achieve Rs. 5 crores, a well-crafted financial plan is essential. A Certified Financial Planner (CFP) can:

Analyse your current investments and recommend improvements.

Design a customised strategy tailored to your income, expenses, and goals.

Provide periodic reviews to ensure you stay on track.

Finally
Achieving Rs. 5 crores in 10 years is a realistic goal if you adopt a disciplined and diversified approach.

Optimise your PPF contributions and channel excess funds into higher-growth investments.

Build a diversified portfolio with equity and debt mutual funds.

Include a small allocation to gold and maintain an emergency fund.

Stay consistent with your SIPs and review your investments regularly.

Work with a Certified Financial Planner to create a personalised roadmap.

By following these steps, you can secure your financial future and meet your goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...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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