Dear Sir, I have 3 uninterrupted SIPs in, hdfc flexible cap, hdfc top 100 and hdfc mid cap fund, 1000 each since Jan. 2011. Now my service has terminated. What to do now please suggest.
Ans: First of all, congratulations on your disciplined investment journey! Having maintained uninterrupted SIPs since January 2011 is an excellent achievement. Your long-term commitment is praiseworthy and reflects your foresight in building wealth for the future. This is something not everyone manages to do consistently, and it already puts you in a strong financial position.
However, with the termination of your service, there is a need to reassess your situation.
Assessing Your Financial Position Post-Service Termination
Since your service has ended, your immediate focus should be on understanding your current financial needs. SIPs are designed for long-term growth, but it’s crucial to ensure that they align with your present circumstances.
Liquidity Needs: Assess your cash flow requirements. Do you have enough savings to manage your household expenses? Without regular income from your job, it’s essential to evaluate whether your current assets and savings can sustain your living expenses.
Emergency Fund: Before continuing your SIPs, ensure that you have an emergency fund in place. Ideally, you should have 6-12 months of living expenses in a liquid asset or savings account. This will provide a cushion in case of unforeseen circumstances.
Debt Obligations: Review any ongoing liabilities. If you have loans or debts, prioritize them. You may want to pause your SIPs temporarily until your financial situation stabilizes. Paying off high-interest loans should be a priority to avoid accumulating more financial strain.
Continue or Pause SIPs?
Given the uncertainty of your income post-service, you may need to make a decision regarding your SIPs.
If You Have a Stable Financial Cushion: If you have adequate savings and don’t foresee any immediate financial strain, you should continue with your SIPs. Staying invested allows you to benefit from rupee cost averaging, which smooths out market volatility over time. This is especially important in equity investments, as long-term investors can gain significantly by riding through market cycles.
If You Are Facing Financial Pressure: If you are facing immediate financial pressure, pausing SIPs may be a prudent choice. This is not to say you should redeem your investments but rather pause further contributions until your income stabilizes. Pausing SIPs temporarily doesn’t close your account, and you can resume contributions when your situation improves.
Evaluating Your Current Mutual Fund Portfolio
Let’s now shift focus to the mutual funds in which you’ve been investing. Since you’ve held these funds for over 13 years, they would have seen various market cycles. This is an ideal time to review whether these funds still align with your goals.
Fund Performance: Review the performance of each of your mutual funds. Compare their returns with the benchmark and peer group funds. Have they consistently outperformed the market? If the funds have underperformed or failed to meet your expectations, you might want to consider reallocating to better-performing funds.
Fund Type: Your portfolio includes large-cap and mid-cap funds. While these offer growth potential, they also carry varying levels of risk. With your service terminated, you might have a lower risk tolerance now. If you feel uneasy about market volatility, you could consider shifting a portion of your portfolio to less volatile options like balanced or hybrid funds.
Benefits of Regular Funds through a Certified Financial Planner
Since you’ve been investing consistently, you must ensure that your investments are well-managed. It’s often tempting to switch to direct funds, thinking that you’ll save on fees, but that may not always be the best approach.
Regular Funds through Certified Financial Planner (CFP): Regular funds, when invested through a certified financial planner, come with the benefit of professional guidance. A CFP provides personalized advice, which ensures that your investments are aligned with your financial goals. They help you navigate complex market conditions and give you peace of mind, especially during uncertain times like post-service termination.
The Disadvantages of Direct Funds: In direct funds, you are responsible for making all investment decisions. This requires in-depth market knowledge and constant monitoring of your portfolio. Without professional assistance, you might miss out on timely opportunities or expose yourself to unnecessary risks. Moreover, the cost-saving from direct funds is often marginal when compared to the benefits of expert advice.
Tax Implications on Mutual Fund Investments
You have been investing for over a decade, and it’s essential to be aware of the tax implications if you decide to redeem any of your mutual funds.
Equity Mutual Funds: If you sell equity mutual funds, any long-term capital gains (LTCG) exceeding Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains (STCG), if the holding period is less than a year, are taxed at 20%.
Debt Mutual Funds: In case you hold debt mutual funds, the taxation rules differ. Both LTCG and STCG from debt funds are taxed as per your income tax slab. This means if you are in the higher income bracket, you could be paying a significant portion in taxes on these gains.
Understanding these tax implications is critical if you are considering redeeming any investments. You may want to strategize your redemptions to minimize the tax burden.
Diversifying Your Investments to Mitigate Risk
With the end of your service, your financial needs and goals may have changed. This is the right time to reassess and possibly diversify your portfolio to align it with your current risk appetite and long-term objectives.
Balance between Risk and Stability: Consider diversifying into debt funds or hybrid funds, which offer a balanced mix of equity and debt. These funds provide stability and reduce exposure to market volatility while still offering decent returns.
Avoid Real Estate: While real estate may seem like a tempting option to secure your future, it lacks liquidity and often involves high maintenance costs. Since you might need liquidity post-service termination, it’s better to focus on more liquid investments like mutual funds, PPF, or even government-backed schemes like Senior Citizen Savings Scheme (SCSS) after you reach 60.
Strengthening Your Insurance Coverage
Since you’ve mentioned that your service has been terminated, it’s crucial to assess your insurance needs, particularly health and life insurance.
Health Insurance: If your previous employer provided health insurance, ensure that you have your own personal health insurance policy now. Medical expenses can be overwhelming, and without coverage, they can severely strain your finances. A comprehensive health insurance plan with adequate cover is crucial.
Life Insurance: Reassess your life insurance requirements. If you hold any investment-linked policies like ULIPs or endowment plans, it may be wise to surrender them and reinvest the proceeds in mutual funds. Pure term insurance is the most cost-effective option to secure your family’s future without the added investment component.
Final Insights
Your consistent SIP investments since 2011 are a testament to your financial discipline. Even though your service has terminated, you are in a good position with a decade-long investment journey behind you. However, the new phase in your life calls for some careful re-evaluation.
Reassess Your Liquidity Needs: Ensure you have enough emergency funds to cover 6-12 months of living expenses.
Review Your SIPs: Continue if you have sufficient savings, or pause temporarily if you are facing financial strain.
Check Fund Performance: Ensure your funds are still aligned with your financial goals. If any underperform, consider switching.
Consider the Benefits of Regular Funds through a CFP: Avoid the temptation to switch to direct funds. Regular funds, managed by a certified financial planner, provide professional guidance and reduce the burden on you to manage your portfolio.
Understand Tax Implications: Be aware of the taxes on your mutual fund gains, especially if you are planning any redemptions.
Diversify: Consider balancing your portfolio with low-risk options like debt or hybrid funds.
Review Your Insurance Needs: Ensure adequate health and life insurance coverage post-service termination.
By taking these steps, you will not only protect your investments but also ensure that your financial journey remains stable and secure for the future.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
Question by Anonymous on Jul 31, 2024Hindi
