Should I stay invested in poorly performing Quant Mutual Funds?

Ans: You have received Rs 80 lakhs from a property sale, and you also have a home loan with Rs 35 lakhs outstanding. You are considering whether to pay off the loan or invest in mutual funds and use a systematic withdrawal plan (SWP) of Rs 50,000 to cover your monthly EMI.

Let us evaluate both options and discuss which could be more beneficial for you in the long run.

Paying Off the Loan
Paying off your home loan can provide psychological relief. You won’t have the burden of debt hanging over you. However, it is important to weigh this decision against the potential opportunity cost.

Debt-Free Comfort: Paying off the loan would make you debt-free and provide mental peace. This is important, especially as you age and your income sources might become less certain.

Interest Savings: Home loans come with an interest cost, which can add up significantly over time. If the interest rate on your home loan is high, paying it off could save you a substantial amount in interest payments.

Guaranteed Return: By paying off the loan, you are essentially earning a guaranteed return equivalent to the home loan interest rate. For example, if your home loan interest rate is 8%, paying off the loan provides a risk-free 8% return.

However, paying off the loan entirely might limit your future growth opportunities. Let's explore the option of investing in mutual funds instead.

Investing in Mutual Funds and SWP
Investing Rs 80 lakhs in mutual funds and using an SWP to pay your EMI is another approach. This could allow your investment to grow over time while also providing liquidity for loan payments.

Potential for Higher Returns: Mutual funds, especially equity funds, have the potential to offer higher returns over the long term compared to the interest rate on your home loan. Over a period of 10–15 years, equity mutual funds have historically delivered returns ranging from 10-12% per annum.

Tax Efficiency: When you withdraw money through an SWP, only the gains are taxed, not the principal. With long-term capital gains (LTCG) above Rs 1.25 lakh taxed at 12.5%, and short-term capital gains (STCG) taxed at 20%, this can be a tax-efficient way of generating income for your EMI payments.

Liquidity: By keeping your Rs 80 lakhs invested in mutual funds, you retain liquidity. If an unexpected financial need arises, you can access your funds easily. This flexibility is not available if you choose to pay off your home loan entirely.

Assessing the Risks of Mutual Fund Investment
While investing in mutual funds offers growth potential, it also comes with risks. You need to be aware of market volatility, especially in equity investments.

Market Risk: Mutual funds are subject to market risks, and your returns are not guaranteed. In a down market, the value of your investment may decline, affecting your ability to withdraw enough to cover your EMI.

Discipline in Withdrawal: Withdrawing Rs 50,000 per month might erode your capital if your investments do not grow as expected. It is crucial to regularly monitor your portfolio’s performance and adjust your SWP accordingly.

Interest Rate vs. Expected Mutual Fund Returns
It is essential to compare the interest rate on your home loan with the expected returns from mutual funds. If your home loan interest rate is low (around 6-7%), the returns from mutual funds, especially in equity, may justify not paying off the loan early.

On the other hand, if your home loan interest rate is high (8% or more), paying off the loan might offer a guaranteed return that exceeds the potential returns from mutual funds, after accounting for market risks and taxes.

Debt Reduction vs. Wealth Creation
Paying Off the Loan: This provides a guaranteed return and makes you debt-free. It may also offer peace of mind as you no longer have to worry about EMI payments.

Investing the Rs 80 Lakhs: This gives your money the potential to grow over time, possibly offering higher returns than the home loan interest rate. You can maintain liquidity and generate a monthly income through an SWP to cover the EMI.

Certified Financial Planner's Suggestion
Given your situation, a balanced approach might work best. Consider splitting your Rs 80 lakhs into two parts:

Part Payment of the Loan: You could pay off Rs 35 lakhs of your home loan to reduce your debt. This would eliminate the interest burden on this portion of the loan.

Invest the Remaining Rs 45 Lakhs: By investing the remaining Rs 45 lakhs in mutual funds, you can still benefit from the growth potential of the equity market. You could set up an SWP from this investment to cover your remaining EMI payments, which will now be lower due to the partial loan repayment.

This approach allows you to reduce your debt while also giving your money the opportunity to grow in the market.

Benefits of Actively Managed Mutual Funds
While index funds have gained popularity, actively managed mutual funds may offer better opportunities for growth, especially over the long term. Let’s understand why actively managed funds could be a better option in your case:

Higher Return Potential: Active fund managers have the flexibility to select stocks that can outperform the broader market. This can potentially provide you with higher returns than a passive index fund, which merely replicates the performance of an index.

Downside Protection: In volatile or bearish market conditions, actively managed funds can adjust their portfolio to reduce exposure to riskier assets. This flexibility can help protect your capital, something index funds cannot offer.

Expertise: Actively managed funds rely on the expertise of fund managers, who actively monitor the market and make adjustments to the portfolio based on market conditions. This hands-on approach can make a significant difference to your overall returns.

Disadvantages of Index Funds
Index funds come with their own set of disadvantages. While they have lower expense ratios, they lack the flexibility and expertise of actively managed funds.

No Opportunity to Outperform: Index funds are designed to replicate the performance of an index, such as the Nifty 50 or Sensex. This means that your returns are capped by the performance of the index. If the market is down, index funds will also underperform, with no opportunity for active management to mitigate the losses.

Limited Downside Protection: Index funds must follow the composition of the index, regardless of market conditions. In a falling market, this lack of flexibility can lead to significant losses, as the fund cannot switch to safer assets or sectors.

Benefits of Regular Funds Through a CFP
There are distinct advantages to investing in mutual funds through a Certified Financial Planner (CFP) rather than opting for direct funds.

Professional Guidance: A CFP brings expertise and experience in managing portfolios. They can help you create a customized investment strategy based on your goals, risk tolerance, and financial situation.

Rebalancing and Adjustments: A CFP regularly reviews your portfolio and makes necessary adjustments to keep it aligned with your goals. This ongoing management ensures that your investments remain on track even during market fluctuations.

Tax-Efficient Strategies: A CFP can help you manage your investments in a tax-efficient manner. By planning withdrawals, redemptions, and asset allocation, they can help minimize the tax impact on your returns.

Comprehensive Financial Planning: A CFP provides more than just investment advice. They offer a holistic approach to your financial well-being, considering your long-term goals, tax planning, insurance needs, and retirement planning.

Final Insights
In your case, the choice between paying off your home loan and investing in mutual funds depends on your risk tolerance, financial goals, and the interest rate on your loan. A combination of part payment of the loan and investment in mutual funds offers a balanced approach, providing both debt reduction and potential for wealth creation.

Opting for actively managed mutual funds over index funds could give you better growth potential and downside protection. Additionally, investing through a Certified Financial Planner (CFP) will provide you with the expertise and guidance needed to maximize your returns while minimizing risk.

It’s important to continuously monitor your investments and adjust them based on changing market conditions and your evolving financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: There is no specific limit on the amount you can transfer to your wife's account for an FD. However, the income generated from that FD will be clubbed with your income and taxed under your name as per the Clubbing of Income rules.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Dear Neha,
I guess there isn't much one can do to control things outside of them, which means in your case, your environment. If you can't change that, then change the way you are managing it. Changing people and their habits is never easy...

Your parents fight have nothing to do with you...if you are a working professional, take solace that you can be out of the house most of the time. And if you are a student, try spending time at the library or any other place where you can study or focus on your goals. Of course, if you are much younger, then things are tough and be in the house and isolate your mind from the inevitable fights. Do try and tell your parents that it bothers, but I don't think that may help you much.

All the best!
Anu Krishna
Mind Coach|NLP Trainer|Author
Drop in: www.unfear.io
Reach me: Facebook: anukrish07/ AND LinkedIn: anukrishna-joyofserving/

Ans: Dear Anonymous,
There maybe several reasons for no sexual relations within your marriage and since you have no listed much on what exactly might be the problem, there isn't much to guide you by.
So, in general, I can only suggest that you and your spouse can have a frank chat and it maybe a simple issue like tiredness during the day or something that requires medical attention. So, do talk and come up with a decision together in this...

All the best!
Anu Krishna
Mind Coach|NLP Trainer|Author
Drop in: www.unfear.io
Reach me: Facebook: anukrish07/ AND LinkedIn: anukrishna-joyofserving/

Ans: Hello;

The value of commercial property owned by you may grow to 7.74 Cr in 20 years (A modest return of 7% considered).

Your MF corpus may grow into a sum of 5.79 Cr after 20 years assuming moderate returns of 12%.

So total 13.53 Cr worth of assets will be available at your disposal at 60 years of age. (EPF, NPS if any will be bonus).

Best wishes!!

Ans: Dear Anonymous,
If there is no scope for reconciliation, what other way out do you have?
Separation maybe hard initially but at least you are not dealing with something on your face on a daily basis. Now, what happens to the property in the event of separation will be determined as to in whose name the property was registered. Of course, this is my understanding. You may want to speak with someone who has knowledge about the legal angle on this.
If you are not happy, then do and act accordingly so that you are moving into a happy zone and in no means what is happening is happy. So, ACT NOW...

All the best!
Anu Krishna
Mind Coach|NLP Trainer|Author
Drop in: www.unfear.io
Reach me: Facebook: anukrish07/ AND LinkedIn: anukrishna-joyofserving/

Ans: Hello;

Their is a grace period of 25-30 days after the premium due date. If you can manage funds by that time then okay else the policy becomes void but their is a window period(1-2 yrs; check policy document for exact details about this aspect) within which you may revive the policy.

Else you may surrender the policy.

You will receive balance fund value of your first year premium after deduction of discontinuation and other charges after lock-in period which is typically 5 years from start of the policy.

Best wishes;

Ans: Dear Anonymous,
RED FLAG! If she acts different when you are alone and when you are outside, surely she is trying to pretend to be someone in either place, there's surely something that she may want to hide or show a side that she wants people to see...
If you are uncomfortable or in doubt, act wise and get to the bottom of it before proceeding any further. If she does not wish to talk about it, that does not mean you need to give in and compromise...
So, take a call on whether you want to live with a person who keeps secrets from you; you will have to spend most of the time playing guessing games!

All the best!
Anu Krishna
Mind Coach|NLP Trainer|Author
Drop in: www.unfear.io
Reach me: Facebook: anukrish07/ AND LinkedIn: anukrishna-joyofserving/

Ans: You are in a stable position with your job, passive income from real estate, and a long-term investment strategy in mutual funds. You have already invested Rs 2 crore in commercial real estate, generating Rs 70,000 per month in passive income, which is a healthy contribution towards your financial stability.

Additionally, you have Rs 60 lakh invested in small-cap mutual funds, which you plan to hold for 20 years. Your medical insurance, emergency fund, and ability to cover family expenses with your salary are strong foundations for wealth creation. However, the question is whether this approach aligns with your long-term goal of “massive wealth creation.” Let's break it down.

Passive Income from Real Estate
Your commercial real estate investment provides a stable passive income. You have no intention to sell this property, which makes it a permanent part of your financial plan.

Advantages:

Provides a consistent income of Rs 70,000 per month.

Offers long-term financial security without needing to liquidate assets.

Income from commercial property tends to appreciate over time.

Points to Consider:

Commercial real estate lacks liquidity. If at any point you need to access the capital, it won’t be easily available.

Income is subject to taxation based on your slab rate, which reduces the net inflow.

While real estate does contribute to a secure financial future, it should not be your sole focus for wealth creation. Diversification in liquid assets is essential.

Mutual Fund Investment in Small Caps
Your investment of Rs 60 lakh in small-cap funds shows that you’re aiming for long-term growth. Small-cap funds have high growth potential but come with high risks as well.

Advantages:

Small caps can generate higher returns in the long term, as you are looking at a 20-year horizon.

Historically, small caps outperform large caps in the long run.

Staying invested for 20 years reduces short-term volatility.

Points to Consider:

Small-cap funds can be volatile, especially during economic downturns.

It’s important to ensure that your portfolio isn't overly concentrated in one asset class. Right now, small caps form a significant portion of your portfolio, and this could expose you to higher risks.

Review and rebalance periodically. Small-cap funds might perform well, but reviewing the performance every few years is important to ensure they align with your goals.

If your objective is wealth creation, small-cap funds are a good vehicle, but you might want to diversify further to reduce risks.

No Additional Investments for Now
You mentioned that you cannot make any more investments currently, which is understandable given your family responsibilities and expenses.

Advantages:

You are financially secure, as your salary covers your day-to-day and family expenses.

Your current investments are already substantial, giving you peace of mind.

Points to Consider:

While it’s good that your salary covers your expenses, future opportunities to invest more should be explored when your financial situation allows. More capital invested earlier could compound significantly over the years.

Consider automated increases in investments. As your salary grows, you can set up an automated increase in SIPs (Systematic Investment Plans) to keep contributing without feeling an immediate financial pinch.

Insurance and Emergency Fund
You have a medical insurance policy and an emergency fund in place, which is essential for financial stability.

Advantages:

This ensures that any medical emergencies or sudden expenses don’t derail your long-term financial plans.

With adequate coverage, your focus on wealth creation remains unaffected by unexpected financial burdens.

Points to Consider:

Ensure that your insurance coverage is adequate for future needs, especially as medical costs rise.

Keep your emergency fund separate and only use it for unforeseen situations. It should ideally cover 6–12 months of living expenses.

Diversification for Long-Term Wealth Creation
Massive wealth creation comes from a balance between high-growth assets like small caps and more stable, diversified investments. Although your current investment strategy has potential, focusing solely on real estate and small caps may not be the best approach for building a massive corpus.

Suggestions:

Increase Diversification: Over time, you might want to add mid-cap and large-cap mutual funds to your portfolio. This will help reduce risk while ensuring reasonable returns.

Tax-Efficient Investments: Consider tax-efficient avenues for investment that can help reduce the tax burden on your passive income and investment returns.

Avoid Over-Concentration: While small caps have the potential for higher returns, avoid putting all your long-term savings into one category. If possible, when your financial situation allows, diversify across other types of funds like balanced funds or even debt funds.

Taxation Considerations
Your commercial real estate income and capital gains from mutual funds are taxable. Keep in mind the taxation on mutual funds:

For equity mutual funds, long-term capital gains (LTCG) over Rs 1.25 lakh are taxed at 12.5%.

Short-term capital gains (STCG) are taxed at 20%.

For debt mutual funds, LTCG and STCG are taxed according to your income tax slab.

To maximise your post-tax returns, consider discussing tax-saving strategies with a Certified Financial Planner.

Can You Achieve Massive Wealth Creation?
Based on your current investments, you are on the right path to financial stability, but achieving massive wealth creation will require careful planning and some adjustments in the future.

Your Strengths:

Real estate provides passive income that adds to your financial security.

You have invested in small caps, which have high growth potential over 20 years.

Your income can sustain your current lifestyle and family expenses.

Areas to Improve:

Your investments are currently heavily concentrated in small caps and real estate. Adding mid-cap and large-cap funds will help reduce risk.

You may want to gradually increase your investment amount over time as your financial situation improves.

Keep tax implications in mind to maximise your wealth.

Final Insights
You are on a steady financial path, and your investments have good growth potential. However, massive wealth creation requires a more diversified approach. You have the foundation to build upon, and with some adjustments in your portfolio and future investment strategy, you can aim for significant wealth over time.

When your financial situation allows, consider diversifying across various mutual fund categories and look into tax-efficient investment strategies. Additionally, regular reviews of your portfolio will ensure that you stay on track to meet your long-term goals.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment