Financial Independence at 44 with 10 Cr - How to Invest Wisely?

Ramalingam Kalirajan |7281 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Sep 17, 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

Question by Rajesh on Sep 16, 2024Hindi

Hello Sir, I am 44 and my wife is 41 and we are both working in the software industry and have a 10 year old daughter. We have taken home salaries of 3.6 L and 3.1 L per month respectively. At this point we have real estate worth of around 5-6 crores (2 flats and 2 plots) and rental income from one of the flats is 20k. Our Financial assets are PF - 1 CR, PPF - 20 L, NPS - 20 L, NPS - 20 L, Sukanya Samrithi - 10 L, Mutual funds - 50 L, Bank balance / FD's - 50 L, Shares / Options / RSU's ($80000) - ~65L, Gold (physical & Digital) - ~1.5 CR, Some Unlisted Shares - 6L, Some LIC's - 6L, Crypto - 7 L and we have 2 good Cars InheritanceOur ancestral inheritance would be roughly 8 CR's We have monthly investments of Mutual Fund SIP's - 1.5 L, Bank RD'S - 1.2 L, PF (Employee & Employer) - 1 L, PPF - 25000 NPS - 30000 and Sukanya Samrithi - 12500 InsuranceWe have taken sufficient term insurance and health insurance of around 1 cr apart from the corporate insurance cover We don't have any loans or EMI's and current monthly expenses are around 1.7 L and typically take an international vacation every year. Considering the uncertainty in the corporate sector we want to achieve financial independence and invest our surplus money wisely. Please advice

Ans: You and your wife have built a strong financial foundation. Your combined monthly salaries of Rs. 6.7 lakh, along with substantial real estate holdings and financial assets, reflect good financial discipline. It’s commendable that you have no loans or EMIs and that you are investing systematically in mutual funds, PPF, NPS, Sukanya Samriddhi, and other instruments.

Your monthly expenses are around Rs. 1.7 lakh, which is manageable given your income. Additionally, you have set up term and health insurance, which protects your family in unforeseen circumstances.

Real Estate Portfolio
Your real estate portfolio of Rs. 5-6 crores is valuable, with one property generating Rs. 20,000 per month in rental income. However, real estate is not as liquid as other investments, and the returns can be inconsistent due to market fluctuations. Diversifying away from real estate into more liquid and scalable assets like mutual funds can enhance your portfolio’s flexibility and growth.

Financial Assets Review
You have accumulated an impressive range of financial assets:

Provident Fund: Rs. 1 crore is a solid, long-term foundation for your retirement.
Public Provident Fund (PPF): Rs. 20 lakh is a reliable and tax-efficient investment.
National Pension Scheme (NPS): With Rs. 20 lakh in NPS and a Rs. 30,000 monthly contribution, this will provide additional retirement security.
Sukanya Samriddhi Yojana (SSY): Rs. 10 lakh saved for your daughter’s future education or marriage is a prudent move.
Mutual Funds: Rs. 50 lakh indicates a good approach to market-based investments.
Bank Balance and Fixed Deposits (FDs): Rs. 50 lakh gives you liquidity but earns low returns. Consider reducing exposure here.
Shares, Options, RSUs: Rs. 65 lakh (approx.) in stocks and RSUs is impressive and provides equity exposure.
Gold: With Rs. 1.5 crore in gold, you have a significant portion in this asset class. While gold is a good hedge, it doesn’t generate regular income.
Unlisted Shares: Rs. 6 lakh in unlisted shares adds some diversity but carries high risk.
Crypto: Rs. 7 lakh in cryptocurrencies is highly speculative. You should carefully monitor this segment.
Income and Investment Streams
You have a total of Rs. 1.5 lakh in mutual fund SIPs, Rs. 1.2 lakh in recurring deposits, Rs. 1 lakh in PF, Rs. 25,000 in PPF, Rs. 30,000 in NPS, and Rs. 12,500 in Sukanya Samriddhi. This indicates you are systematically investing Rs. 4.07 lakh per month. Your strategy of spreading investments across different asset classes is good, but there’s room for optimization.

Insurance
Your term insurance of Rs. 1 crore is sufficient to provide financial security for your family. You also have adequate health insurance, which is critical given the rising costs of healthcare. Since you are covered with corporate insurance as well, you are in a strong position.

Monthly Expenses and Lifestyle
Your monthly expenses of Rs. 1.7 lakh include international vacations, reflecting a comfortable lifestyle. Given your substantial income, this is well within your budget. However, given the uncertainty in the corporate sector, you should focus on increasing your investment surplus and potentially adjusting your lifestyle slightly to allocate more toward long-term financial independence.

Ancestral Inheritance
You are expecting an inheritance of Rs. 8 crore, which adds further to your financial strength. While inheritance can offer significant financial security, it is important not to rely solely on this for your long-term financial planning. Planning for financial independence with the assumption that this inheritance may be delayed or used differently is wise.

Goals for Financial Independence
Given the uncertainty in the corporate sector, achieving financial independence as early as possible is a wise goal. Here are some key strategies to focus on:

Build a Corpus for Early Retirement: Financial independence means having enough passive income to cover your expenses without relying on your active income from employment. To achieve this, you should aim to build a corpus that generates sufficient returns to cover your expenses.

Review Investment Allocation: While your current investments are diversified, there is room for improvement. Mutual funds should be a bigger part of your investment strategy due to their higher potential for growth and liquidity compared to real estate and FDs. You can consider increasing your SIPs or even adding more funds to increase equity exposure.

Enhance SIP Contributions: You are currently contributing Rs. 1.5 lakh to SIPs. To fast-track your goal of financial independence, consider increasing your SIP contributions by Rs. 50,000 to Rs. 1 lakh more per month. Since you already have a comfortable income surplus, this should be feasible.

Bank Recurring Deposits (RDs): Rs. 1.2 lakh per month in RDs is a significant amount. While RDs are low risk, the returns are also limited. You may consider redirecting some of this towards higher-return options like mutual funds.

Avoid Over-Reliance on Gold: With Rs. 1.5 crore in gold, your portfolio may be too heavily tilted toward this asset. Gold does not generate regular income or dividends, and its growth potential is limited. Consider gradually reducing your gold exposure and moving funds into more productive assets like equities.

Unlisted Shares and Crypto: Rs. 7 lakh in crypto and Rs. 6 lakh in unlisted shares carry high risk. Monitor these investments carefully, and avoid increasing exposure unless you fully understand the risks. While diversification is good, high-risk assets should not form a large part of your portfolio.

Reassess LIC Policies: If your LIC policies are purely for investment purposes, they may not be the most efficient vehicles for wealth creation. You could consider surrendering these and redirecting the funds into higher-return mutual funds, where returns are generally better over the long term.

Planning for Your Daughter’s Future
You’ve already made good progress with Rs. 10 lakh in Sukanya Samriddhi. Continue contributing to this for her education and marriage. Additionally, consider earmarking a portion of your mutual fund investments specifically for her education, given the rising costs of higher education.

Early Retirement Consideration
You are in a strong financial position to aim for early retirement. Here are some recommendations to strengthen this possibility:

Calculate Required Corpus: Based on your current lifestyle and expected future expenses, estimate the corpus you need to retire comfortably. Given your monthly expenses of Rs. 1.7 lakh, your retirement corpus should be large enough to generate sufficient passive income.

Focus on Increasing Equity Exposure: Equities are a growth-oriented asset class, and with your long-term horizon, increasing your exposure to equity mutual funds can provide the growth needed to achieve financial independence sooner. This is especially important if you wish to retire early.

Increase Contributions to NPS: NPS is a great retirement-oriented product that provides both tax benefits and long-term growth potential. You can consider increasing your contributions to NPS to create a larger retirement corpus.

Final Insights
You and your wife have laid the foundation for a financially secure future with a diversified portfolio and strong income. However, to achieve financial independence and protect against corporate sector uncertainty, you should focus on optimizing your investments.

By increasing SIP contributions, reducing exposure to low-return instruments, and focusing on high-growth assets, you can fast-track your financial independence. Additionally, ensure that your investment strategy accounts for your daughter's future, early retirement goals, and potential lifestyle changes.

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.

MoneyReply

Ans: It’s commendable to see your financial success and structured investment approach, especially as both of you work in the demanding software industry. Your significant asset base, debt-free status, and disciplined investment strategy set a solid foundation for early retirement. Given the uncertainties in the IT sector, it’s crucial to structure your investments thoughtfully, focusing on capital growth, liquidity, and passive income to support a comfortable life for years to come.

Let's dive into a 360-degree solution to help you retire early with a sustained, smart investment approach that complements your current lifestyle and aspirations.

1. Income and Investment Strategy for Wealth Growth
Current Income & Cash Flow: Your combined monthly take-home of Rs 6.5 Lakh is robust. It supports your lifestyle expenses and allows significant savings towards your investment goals.

Monthly Investments: Your current monthly investment outlay of Rs 4.75 Lakh (including Mutual Funds, Bank RDs, PF, PPF, NPS, and Sukanya Samrithi Yojana) reflects strong financial discipline. This diversified investment approach is ideal for creating a balanced portfolio.

Next Steps: Given your goal of early retirement, consider redirecting your Bank Recurring Deposits (RDs) towards higher-yielding assets like mutual funds. RDs provide fixed returns but are limited in their potential to outpace inflation, making them less ideal for wealth accumulation over the long term.

2. Real Estate Holdings and Passive Income
Existing Real Estate Assets: You hold significant real estate assets, including two flats and two villa plots. With one flat rented out, you’re generating a monthly rental income of Rs 20,000.

Strategy for Real Estate: While real estate offers a stable asset base, it tends to lack liquidity. This can be a disadvantage if you need access to funds during economic downturns or other emergencies. Instead of increasing real estate investments, consider focusing on instruments that offer higher liquidity and predictable returns. Retain your current properties, but avoid new real estate purchases to maintain a well-rounded, diversified portfolio.

3. Mutual Funds for Long-Term Growth and Capital Appreciation
Current Mutual Fund Portfolio: With Rs 50 Lakh invested in mutual funds and a healthy Rs 2 Lakh monthly SIP, your mutual fund strategy provides a strong foundation for growth. Since mutual funds offer higher returns than traditional deposits and are tax-efficient, they suit your long-term goals well.

Active vs. Index Funds: Active funds are highly recommended over index funds, especially for long-term investors like yourself. Active funds are managed by expert fund managers who actively select stocks to achieve higher returns. Regular review and professional fund management make actively managed funds adaptable to changing market dynamics, offering a better return profile.

Actionable Plan: Consider diversifying within mutual funds across large-cap, mid-cap, and multi-cap categories. Large-cap funds offer stability, mid-cap funds add growth potential, and multi-cap funds provide a balanced approach. Review fund performance yearly with a Certified Financial Planner (CFP) to adjust allocations as needed. A balanced, actively managed mutual fund portfolio can be a key driver toward your financial goals.

4. Substitute Equity Exposure with Equity Mutual Funds
Transition from Direct Equity to Equity Mutual Funds: Given the volatile nature of direct stock investments, you may want to focus on equity mutual funds instead. These funds offer professional management, diversified portfolios, and ease of monitoring. Managed by experts, they balance the risks of individual stock investments, especially relevant in fluctuating markets like IT.

Alternative to RSUs and Options: For your RSUs and other stock options, you could consider transferring the proceeds gradually into diversified mutual funds when possible. This approach allows you to benefit from market exposure while reducing the risks tied to specific stocks or sectors.

Recommended Strategy: Shift from direct stocks to equity-oriented mutual funds, especially through large and flexi-cap funds. These funds offer market-linked growth without requiring you to manage individual stocks actively. This transition can improve your portfolio's resilience, particularly in times of market downturn.

5. Retirement-Oriented Investments: PF, NPS, and PPF
Provident Fund (PF) and NPS: Your Rs 1.1 Crore in PF and Rs 20 Lakh in NPS contribute significantly to your retirement stability. With monthly contributions of Rs 1 Lakh (PF) and Rs 60,000 (NPS), these funds will provide a reliable income base post-retirement.

Investment Strategy for NPS: As you approach retirement, shift a larger portion of your NPS allocation toward debt-based options to reduce market exposure. This ensures capital preservation and steady income.

PPF & Sukanya Samrithi Yojana: With approximately Rs 30.5 Lakh invested in these schemes, you benefit from tax-free returns and stable growth. Continue with your PPF and Sukanya contributions as they provide security and are especially suitable for goals like your daughter’s education.

6. Debt Instruments and Bonds for Stability
Current Debt Portfolio: With Rs 25 Lakh in bonds and structured products, you have a stable, lower-risk segment in your portfolio. Bonds offer security, especially valuable during market downturns.

Recommended Approach: Continue holding these bonds but limit further investments in low-yield bonds. Diversified bond mutual funds may provide similar stability with better tax efficiency. Bonds offer the advantage of capital preservation, so they are well-suited for lower-risk, short-term goals.

7. Gold as a Wealth Preservation Tool
Current Holding: With Rs 1.5 Crore in physical and digital gold, you have a substantial allocation in this asset class.

Recommendation: Avoid increasing gold holdings further. While gold provides a hedge against inflation, it lacks regular income or growth potential. Retain your existing holdings, but prioritize mutual funds and debt instruments for future investments to keep a balanced asset mix.

8. Insurance Policies and Legacy Planning
Review of Existing LIC Policies: Your Rs 6 Lakh in LIC policies likely combines insurance with low returns. Consider surrendering or restructuring any low-return policies and reallocating the funds into mutual funds for better growth.

Estate Planning and Inheritance: Given your approximate inheritance value of Rs 7-8 Crore, work with a CFP to set up an estate plan, which could include a trust or will. This structure will ensure your assets are transferred smoothly and in a tax-efficient manner.

9. International Vacations and Lifestyle Expenditures
Annual Travel and Lifestyle Budgeting: Your yearly international vacations are part of your lifestyle enjoyment. Budget a fixed sum for travel and luxury expenses. By having a travel fund, you can enjoy vacations without impacting long-term financial goals.

Emergency Fund: Allocate enough for an emergency fund, preferably covering 12-15 months of expenses. Liquid mutual funds or fixed deposits are ideal for this fund due to their safety and easy accessibility.

10. Taxation Strategy and Exit Plan
Capital Gains on Mutual Funds: For equity mutual funds, long-term capital gains above Rs 1.25 Lakh are taxed at 12.5%, while short-term gains are taxed at 20%. Debt funds are taxed as per your income slab. Consider holding equity investments for the long term to minimize tax impact.

Equity Mutual Fund Withdrawals: As you near retirement, withdraw gradually from equity mutual funds to manage capital gains efficiently. Your CFP can help schedule withdrawals to optimize tax outcomes and maintain income flow post-retirement.

Final Insights
Your financial strategy reflects careful planning and a strong commitment to early retirement. With a few strategic adjustments—such as emphasizing actively managed mutual funds, gradually moving away from direct equity, and restructuring low-yield assets—you can further strengthen your portfolio. Regular reviews with a CFP will help you stay aligned with your goals, market conditions, and tax considerations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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