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Sunil

Sunil Lala  |193 Answers  |Ask -

Financial Planner - Answered on Apr 10, 2024

Sunil Lala founded SL Wealth, a company that offers life and non-life insurance, mutual fund and asset allocation advice, in 2005. A certified financial planner, he has three decades of domain experience. His expertise includes designing goal-specific financial plans and creating investment awareness. He has been a registered member of the Financial Planning Standards Board since 2009.... more
Asked by Anonymous - Apr 09, 2024Hindi
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I'm 22 years old and I invested some amount of money in smallcap funds and I want to redeem this amount after 40 year's. Is it worth

Ans: Yes
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  |4605 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 04, 2024

Asked by Anonymous - Jun 26, 2024Hindi
Money
Hi Iam 60 years old I m having mutual funds with current market value of 27 lacs . I have 15 lacs invested in insurance plan which will be matured at my 66 th year . Shall I redeem my mutual funds with 1 percent ( less than one year ) penalty and reinvest them or shall I keep them the same for some more time
Ans: Thanks for reaching out. At 60, managing your investments smartly is essential. Let's go over your situation and explore the best path forward. We'll talk about mutual funds, your insurance plan, and how to make wise decisions for the future. Understanding your options can help you feel more confident and secure about your financial future.

Understanding Mutual Funds and Your Investment
Mutual funds are a great way to grow your wealth. They pool money from many investors to buy stocks, bonds, or other securities. Your Rs 27 lakhs in mutual funds is a significant amount. It shows your commitment to growing your savings. Let's understand why they are a popular choice.

The Power of Compounding
Mutual funds benefit from the power of compounding. Compounding means earning returns on both your original investment and on the returns that investment earns. Over time, this can lead to exponential growth.

For instance, the returns you earn this year will generate their own returns in the next year, creating a snowball effect. Keeping your mutual funds invested longer can help them grow more significantly.

Professional Management
Mutual funds are managed by experts. Certified financial planners and fund managers have the experience and knowledge to make informed investment decisions. They constantly monitor market conditions and adjust the fund’s portfolio to maximize returns.

This professional management can be beneficial, especially if you don't have the time or expertise to manage investments yourself.

Diversification
Mutual funds offer diversification, spreading your investment across various assets. This helps in reducing risk because not all investments will move in the same direction at the same time.

If some investments perform poorly, others may perform well, balancing the overall performance of the fund.

Evaluating Your Insurance Plan
You have Rs 15 lakhs invested in an insurance plan maturing at 66. It’s essential to evaluate this investment carefully. Insurance plans often mix investment and insurance, which can be complex.

Understanding Insurance Plans
Insurance plans like ULIPs or traditional endowment policies provide both insurance cover and an investment component. However, the returns on these plans can be lower compared to pure investment options like mutual funds.

Since your plan matures when you're 66, it’s crucial to consider if the returns justify keeping the money invested. Typically, these plans offer lower returns due to high management fees and insurance costs.

Consider Surrendering the Policy
If your insurance plan’s returns are not meeting your expectations, you might consider surrendering it. Once surrendered, you can reinvest that amount into more lucrative options. This decision should be taken carefully, considering any penalties or charges involved.

Should You Redeem Your Mutual Funds?
Now, let's address the key question: should you redeem your mutual funds with a 1% penalty or keep them invested?
Exploring Tax Implications on Mutual Fund Redemption
When you redeem your mutual funds, it's crucial to consider the tax implications. These can significantly impact your net returns. Here’s a detailed breakdown:

Taxation on Equity Mutual Funds
Equity mutual funds invest primarily in stocks. The tax on equity mutual funds is structured as follows:

Short-term Capital Gains (STCG): If you redeem equity mutual funds within one year of investment, gains are considered short-term. These are taxed at 15%.

Long-term Capital Gains (LTCG): Gains on equity mutual funds held for more than one year are classified as long-term. LTCG up to Rs 1 lakh is tax-free per financial year. Gains exceeding this limit are taxed at 10% without the benefit of indexation.

For instance, if you redeem equity mutual funds and your gain is Rs 1.5 lakhs, you will be taxed 10% on Rs 50,000 (Rs 1.5 lakhs - Rs 1 lakh exemption).

Taxation on Debt Mutual Funds
Debt mutual funds primarily invest in bonds and other fixed-income securities. Their taxation is as follows:

Short-term Capital Gains (STCG): Gains from debt funds held for less than three years are taxed as per your income tax slab. For example, if you fall into the 20% tax bracket, your gains will be taxed at 20%.

Long-term Capital Gains (LTCG): Gains from debt funds held for more than three years are taxed at 20% with indexation. Indexation adjusts the purchase price for inflation, which reduces your taxable gains.

Dividend Distribution Tax (DDT)
Earlier, dividends from mutual funds were taxed before being paid to investors. However, as of April 2020, dividends are now taxable in the hands of investors. They are taxed at your applicable income tax slab rate. If your dividend income exceeds Rs 5,000 in a financial year, a TDS of 10% is applicable.

Evaluating Fund Performance: When to Consider Redeeming
Assessing the performance of your mutual funds is vital. Underperformance can erode your wealth, especially if held over the long term. Here’s how to approach it:

Reviewing Fund Performance with a CFP
Certified Financial Planners (CFPs) have the expertise to evaluate your mutual funds comprehensively. They consider various factors like historical performance, fund management quality, and how well the fund aligns with your financial goals. If a fund is consistently underperforming compared to its benchmark or peer group, it may be time to consider redemption.

Benchmark Comparison: Compare the fund’s performance against its benchmark index. If the fund consistently underperforms, it might not be adding value to your portfolio.

Peer Group Analysis: Assess how the fund fares compared to similar funds in the same category. Consistent underperformance relative to peers is a red flag.

Fund Manager’s Strategy: Understand the fund manager’s strategy and changes in the management team. Frequent changes or inconsistent strategies can affect performance.

Bearing the Cost and Reinvesting
If your CFP’s review indicates that your fund is underperforming, it might be wise to bear the cost of redemption (including any penalties or taxes) and reinvest in a better-performing fund. Here’s why:

Opportunity Cost: Continuing to hold an underperforming fund can result in missed opportunities for growth. Redeeming and reinvesting in a better fund can enhance your returns over time.

Optimizing Returns: Shifting to a fund with a solid track record and consistent returns can optimize your portfolio’s overall performance.

Reinvestment Strategies
After redeeming your mutual funds, deciding where to reinvest is crucial. Let’s explore some effective reinvestment strategies:

Actively Managed Funds
Actively managed funds are those where fund managers make strategic decisions to outperform the market. These funds often involve higher management fees but can offer higher returns compared to passively managed funds like index funds.

Advantages of Actively Managed Funds:

Potential for Higher Returns: Skilled managers actively select investments aiming to outperform the market.
Risk Management: Managers adjust portfolios based on market conditions, potentially reducing downside risk.
Tactical Adjustments: Actively managed funds can capitalize on market opportunities through tactical adjustments.
While these funds can offer better returns, their success largely depends on the manager’s expertise. It's essential to choose funds with proven track records and experienced managers.

Regular Funds through CFPs
Investing in regular funds through a Certified Financial Planner can be beneficial. Here’s why:

Personalized Advice: CFPs provide tailored advice based on your unique financial goals and risk tolerance.
Holistic Planning: They consider your entire financial situation, including retirement planning, insurance, and tax implications.
Informed Decisions: With a CFP, you get professional guidance to make informed investment decisions, avoiding common mistakes.
Direct funds, while cheaper due to lower fees, lack this personalized guidance. Regular funds ensure you have professional support to navigate the complexities of investing.

Power of Compounding and Staying Invested
The longer you stay invested in mutual funds, the more you benefit from the power of compounding. Compounding helps your investments grow exponentially over time. Here’s how:

Earning on Earnings: You earn returns not just on your principal but also on the returns generated, leading to exponential growth.
Time Horizon: Longer investment horizons amplify the effect of compounding. The earlier you start, the more you gain.
For example, if your mutual fund grows at 10% annually, your investment doubles approximately every 7.2 years. Staying invested helps in leveraging this growth potential.

Risk Management and Portfolio Diversification
Managing risk and diversifying your portfolio are essential for long-term financial health. Here’s how mutual funds help in this regard:

Diversification
Mutual funds spread your investment across various assets, reducing risk. This is because different assets rarely move in the same direction simultaneously. Diversification helps in balancing your portfolio, minimizing the impact of any single asset’s poor performance.

Asset Allocation
Effective asset allocation involves spreading investments across different asset classes (equity, debt, etc.) based on your risk tolerance and financial goals. This strategy helps in managing risk and optimizing returns.

Systematic Withdrawal Plans (SWPs) for Steady Income
Given your retirement phase, consider setting up a Systematic Withdrawal Plan (SWP). SWPs allow you to withdraw a fixed amount regularly from your mutual fund investment. This can provide a steady income stream while keeping the remaining capital invested.

Benefits of SWPs
Regular Income: SWPs provide consistent cash flow, ideal for retirees.
Tax Efficiency: SWPs can be tax-efficient compared to dividends or interest income, as they are treated as capital gains.
Flexibility: You can adjust the withdrawal amount and frequency based on your needs.
Regular Portfolio Reviews and Rebalancing
Regular reviews and rebalancing are crucial to maintaining a healthy portfolio. Here’s why:

Periodic Reviews
Assess your investments periodically to ensure they align with your financial goals and risk tolerance. Regular reviews help in identifying underperforming assets and making necessary adjustments.

Rebalancing
Rebalancing involves adjusting your portfolio to maintain your desired asset allocation. Over time, some investments may grow more than others, altering your original allocation. Rebalancing helps in realigning your portfolio with your risk tolerance and goals.

For example, if equity investments outperform and their proportion in your portfolio increases, you might need to sell some equities and buy more debt to maintain balance.

Final Insights
Your investment journey at 60 is crucial for ensuring a secure and comfortable retirement. Your Rs 27 lakhs in mutual funds and Rs 15 lakhs in an insurance plan are significant assets that require careful management.

Tax Implications: Understand the tax implications of redeeming your mutual funds, considering STCG and LTCG based on your holding period.

Evaluating Fund Performance: Regularly assess the performance of your mutual funds. If they are underperforming, consider redeeming and reinvesting in better-performing options after consulting a Certified Financial Planner.

Reinvestment Options: Explore actively managed funds and regular funds through CFPs for personalized advice and potentially higher returns.

Power of Compounding: Leverage the power of compounding by staying invested longer. It significantly boosts your returns over time.

Risk Management: Diversify your portfolio and adjust your asset allocation based on your risk tolerance and financial goals.

Steady Income: Consider setting up a Systematic Withdrawal Plan (SWP) for a regular income stream during your retirement years.

Regular Reviews and Rebalancing: Regularly review and rebalance your portfolio to ensure it stays aligned with your financial objectives.

Making informed decisions about your investments with the guidance of a Certified Financial Planner can help you achieve financial stability and peace of mind during your retirement years.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Latest Questions
Maxim

Maxim Emmanuel  |288 Answers  |Ask -

Soft Skills Trainer - Answered on Jul 12, 2024

Asked by Anonymous - Apr 23, 2024Hindi
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Career
Hello sir my name is Santu Chakraborty.I am 34 year old now unmarried. My qualification is Bsc botany honours with 2nd class +diploma in mechanical engineering with distinction +btech in mechanical engineering from government engineering college west Bengal with 7.5 dgpa.I have 6 years of teaching experience in private diploma engineering college and now I working as a vocational teacher in automobile engineering department in gov high school.In my early phase of life I am going through lots of Misguide,seveare Anxiety issue. Nobody can help me on that phase.I recover mostly by my own after various dillema.I want to work in mechanical r and d company, Mechanical design basis company and also upgrade my teaching carrier. How can I start my journey at this age ?what is the risk factor also? Please tell me. I am very enthusiastic dedicated person. I have no guide in my home. My father is vegetable seller.
Ans: Hi Santu Chakraborty,

This is a really exhaustive query.

The journey thru' your acquisition of qualifications has been vast!

In the course of your life you are now suffering from SNIOP (SUSCEPTIBLE NEGATIVE INFLUENCE OTHER PEOPLE) this happens when you let others control your life.

I have this poem.. Especially for one's like you!

The Guy in the Glass

When you get what you want in your struggle for pelf,
And the world makes you King for a day,
Then go to the mirror and look at yourself,
And see what that guy has to say.
For it isn't your Father, or Mother, or Wife,
Who judgement upon you must pass.
The feller whose verdict counts most in your life
Is the guy staring back from the glass.
He's the feller to please, never mind all the rest,
For he's with you clear up to the end,
And you've passed your most dangerous, difficult test
If the guy in the glass is your friend.
You may be like Jack Horner and "chisel" a plum,
And think you're a wonderful guy,
But the man in the glass says you're only a bum
If you can't look him straight in the eye.
You can fool the whole world down the pathway of years,
And get pats on the back as you pass,
But your final reward will be heartaches and tears
If you've cheated the guy in the glass.

Dale Wimbrow (c) 1934

Get the enthusiasm going, don't get embroiled in what life has been before!

Take a stranglehold of your life and make it BIG!

The opportunities are.. Miracles waiting to happen, what are you waiting for.. You are the catalyst!?
Maxim Emmanuel.

Pick up yourself don't be a victim of self pity.

If you do need further professional advice happy to assist
https://m.me/maxim.emmanuel.2024

...Read more

Nayagam P

Nayagam P P  |1830 Answers  |Ask -

Career Counsellor - Answered on Jul 12, 2024

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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