Hello Sir, I have a property of 30 Lakhs which is giving me monthly rental of 10K. Can I dispose this and invest in Sharia Based mutual funds will I be getting any monthly benefits

Ans: Understanding Your Current Investment and Income

You currently own a property worth Rs 30 lakh, generating a monthly rental income of Rs 10,000. This provides a stable, though modest, return. You are considering disposing of this property and investing in Sharia-based mutual funds. Your goal is to determine if this switch will provide you with regular monthly benefits.

Appreciating Your Current Position

First, congratulations on owning a property that provides rental income. This is a significant achievement and a good starting point for your financial journey. It’s wise to explore options for potentially higher returns and adherence to Sharia principles.

Evaluating the Property's Financial Performance

Your property gives you a rental yield of approximately 4% annually (Rs 10,000 per month x 12 months = Rs 1,20,000 per year; Rs 1,20,000 / Rs 30,00,000 = 4%). This yield is relatively low compared to potential returns from mutual funds, including Sharia-based funds, which often aim for higher returns.

Understanding Sharia-Based Mutual Funds

Sharia-based mutual funds are designed to comply with Islamic laws. They avoid investments in businesses related to alcohol, gambling, and interest-bearing instruments. These funds focus on ethical investing, which can be appealing for those wanting to align their investments with their values.

Potential Returns from Sharia-Based Mutual Funds

Sharia-based mutual funds can offer competitive returns. Historically, equity mutual funds in India have provided returns ranging from 10% to 15% annually. While past performance is not indicative of future results, this gives a benchmark for what you might expect.

Calculating Potential Returns

If you invest Rs 30 lakh in Sharia-based mutual funds, aiming for an average annual return of 12%, your investment could grow substantially. Here’s a rough calculation:

Investment Amount: Rs 30 lakh
Expected Annual Return: 12%
Annual Returns: Rs 3.6 lakh (Rs 30 lakh * 12%)
This translates to a monthly income of Rs 30,000 (Rs 3.6 lakh / 12 months). This is significantly higher than your current rental income of Rs 10,000 per month.

Systematic Withdrawal Plan (SWP)

To receive regular monthly benefits from mutual funds, you can use a Systematic Withdrawal Plan (SWP). An SWP allows you to withdraw a fixed amount at regular intervals (e.g., monthly). This can provide a steady income stream similar to your rental income.

Implementing an SWP

Assume you want to withdraw Rs 30,000 per month. Here’s how you can structure it:

Initial Investment: Rs 30 lakh
Monthly Withdrawal: Rs 30,000
Expected Annual Return: 12%
An SWP can provide the needed liquidity while the remaining amount continues to grow. This ensures you benefit from both regular income and capital appreciation.

Advantages of Sharia-Based Mutual Funds

Ethical Investing: Aligns with your values by avoiding businesses that contradict Sharia principles.

Diversification: Provides exposure to a wide range of asset classes and sectors, reducing risk.

Professional Management: Managed by experts who make informed decisions to maximize returns.

Liquidity: Easier to liquidate compared to property, offering more financial flexibility.

Risks and Considerations

While mutual funds offer higher returns, they come with risks. Market fluctuations can impact returns. Diversification and professional management mitigate some risks, but they don’t eliminate them. It’s important to have a long-term perspective and not panic during market downturns.

Comparison: Rental Income vs. Mutual Fund Returns

Rental Income: Steady but relatively low returns. Property maintenance and tenant management can be challenging.

Mutual Funds: Potentially higher returns and more flexibility. Risks associated with market volatility.

Tax Implications

Rental income is taxable as income from house property. Gains from mutual funds are taxed differently. Equity mutual funds held for more than one year are subject to long-term capital gains tax, with certain exemptions. Consult with a tax advisor to understand the implications based on your specific situation.

Addressing Concerns and Empathy

It’s natural to have concerns about switching from a known income source to a potentially volatile one. Understand your risk tolerance and financial goals. A Certified Financial Planner (CFP) can provide personalized advice to help you make an informed decision.

Actionable Steps for Transition

Assess Current Property Value: Get an accurate valuation to ensure you get a fair price.

Plan for Debt Clearance: If you have any outstanding debt, plan to clear it with part of the sale proceeds.

Choose the Right Mutual Funds: Research and select Sharia-compliant funds that align with your goals.

Implement SWP: Set up a systematic withdrawal plan for regular income.

Monitoring and Review

Regularly review your investments. Market conditions and personal circumstances change over time. Adjust your investment strategy as needed. A CFP can assist in monitoring and rebalancing your portfolio.

Final Insights

Switching from property rental income to Sharia-based mutual funds can potentially offer higher returns and align with your values. Using a Systematic Withdrawal Plan can provide regular monthly benefits, similar to rental income. However, mutual fund investments come with risks and require a long-term perspective. Regularly review your investments and consult with a Certified Financial Planner (CFP) to ensure your financial goals are on track. With careful planning and disciplined investing, you can achieve a stable and growing income stream.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in