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Ramalingam Kalirajan |8231 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 28, 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 - Oct 26, 2024Hindi

I have paid 30 lakhs at 6 lakhs annually in SBI smart privilege LP for 5 years. It is complete now as on date. Is it worth to continue in it or withdraw and invest in MF for good returns in 3 years

Ans: Let's thoroughly assess your SBI Smart Privilege Life Plan (LP) investment and its potential in comparison to mutual funds (MFs) for generating good returns over the next three years.

1. Evaluating SBI Smart Privilege Life Plan's Potential
SBI Smart Privilege is a ULIP (Unit Linked Insurance Plan), which combines life insurance with market-linked investments. Given its structure, it has both advantages and limitations that need consideration for meeting your current financial goals.

High Charges: ULIPs typically include premium allocation, administration, and fund management charges, which can significantly impact returns. Over the policy term, these charges reduce your net investment value compared to mutual funds.

Moderate Flexibility: While ULIPs provide insurance coverage and tax benefits under Section 80C, they also carry limited flexibility. Investment in mutual funds may offer better control and liquidity, especially when aligning with short-term financial goals.

Lock-In Period and Surrender Charges: Although you have completed the mandatory five-year premium period, early withdrawal may still carry surrender charges, which could impact your returns. However, some policies waive this after a certain term, so confirming with SBI on exact charges is advisable.

2. Understanding the Three-Year Investment Goal
For your current objective of achieving growth within three years, the choice of investment needs to be strategic and aligned with optimal returns:

Short-Term Goals and ULIPs: ULIPs are generally better suited for long-term goals, as market-linked benefits are maximized over an extended horizon. For three years, the costs of maintaining a ULIP may outpace returns, especially if you are aiming for higher liquidity and growth.

Growth Opportunities in Mutual Funds: Mutual funds offer a flexible structure, allowing selection of funds based on investment tenure and risk tolerance. Actively managed funds, particularly in categories such as hybrid or equity-oriented funds, tend to outperform ULIPs in short-term returns due to lower charges and active management strategies.

3. Exploring Mutual Fund Advantages for a Three-Year Plan
Mutual funds bring various advantages that align well with short- to medium-term investment horizons:

Enhanced Flexibility and Liquidity: Mutual funds provide the flexibility to redeem funds whenever necessary, offering higher liquidity compared to ULIPs. This flexibility is ideal for achieving a target within three years.

Lower Expense Ratios: Actively managed mutual funds typically have lower expense ratios compared to ULIPs. By investing directly in a mutual fund portfolio, you gain the potential for better growth as fund returns aren’t diminished by high administrative charges.

Tax Efficiency: For equity mutual funds, long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term gains (held less than one year) are taxed at 20%. Debt fund gains are taxed as per your income slab. This tax efficiency can further improve your returns over the investment period.

4. Active Management vs. Direct Fund Investment
Opting for a direct investment may seem cost-effective, but regular plans through a Certified Financial Planner (CFP) offer critical benefits. A CFP-backed investment route brings personalized guidance, portfolio monitoring, and tax-efficient rebalancing, which are essential in adapting to changing markets. In direct funds, you would need to manage these aspects on your own, which could lead to missed opportunities or unmanaged risk.

5. Suggested Mutual Fund Categories for Your Goal
Based on your three-year timeframe, the following categories may suit your risk-return expectations:

Hybrid or Balanced Funds: These funds mix equity and debt, giving a balanced risk profile. They aim for moderate returns with less volatility, which is favorable for short- to medium-term goals. This category can stabilize your portfolio without limiting growth.

Dynamic Asset Allocation Funds: These funds adjust their equity-debt allocation based on market conditions. By dynamically responding to market changes, these funds offer both growth potential and risk mitigation, making them suitable for three-year investments.

Debt Mutual Funds: If you prefer minimal risk, debt funds can be a suitable alternative. They invest in bonds and fixed-income instruments, generally providing more stable returns. Keep in mind, though, that debt funds may yield lower returns compared to equity but remain advantageous for safety-focused investments.

6. Portfolio Rebalancing and Periodic Reviews
Investing in mutual funds requires periodic reviews and rebalancing to keep the portfolio aligned with your goals. Reviewing the fund’s performance annually allows adjustments based on returns, market conditions, and any changes in your risk tolerance. A Certified Financial Planner can play a vital role here by managing rebalancing, enhancing tax efficiency, and providing advice tailored to your evolving needs.

7. Tax Implications and Efficient Withdrawals
Your mutual fund returns will be subject to capital gains tax based on the duration and type of fund:

Equity Funds: For equity funds, LTCG above Rs 1.25 lakh is taxed at 12.5%, while STCG is at 20%.

Debt Funds: Gains from debt funds are taxed as per your income slab, both for short- and long-term holdings. This taxation structure allows for tax-efficient planning and effective withdrawals.

By structuring your withdrawals and holding period, you can maximize post-tax returns, an important consideration for short-term growth.

8. Final Insights
Given your three-year timeframe and growth target, mutual funds are likely to provide higher returns with flexibility and control compared to continuing in the SBI Smart Privilege Life Plan. The fund flexibility, lower charges, and effective tax management options in mutual funds are strong advantages. Consulting a Certified Financial Planner will enable you to build a customized mutual fund portfolio with enhanced monitoring, rebalancing, and guidance that aligns with your goal. Moving funds from a high-cost ULIP structure to a targeted mutual fund portfolio may significantly improve your investment journey and results.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

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

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.