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Ramalingam Kalirajan |7379 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 11, 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

Question by Visu on Jun 11, 2024Hindi

I am retired single with no family commitment. I have no pension but I am depending on Dividend of Mutual funds and shares. Total investment in Mutual fund is Rs.75 lacs of out of which 90% in dividend pay out and 10% in growth. Rs.20 lacs in bonds; being a minimalist, the amount of dividend which I get is enough for me as of now; and even if I apply for SWP, I am okay with the amount of investment, as I need not require to leave legacy. Please suggest me, my investmetn segment is okay; or I need to reshuffle the investments.

Ans: Firstly, it’s impressive to see your clear and minimalist approach to your finances. Being retired and single with no family commitments allows you to focus solely on your financial well-being and personal goals. Your investment strategy is quite commendable, particularly your reliance on dividends and bonds for a stable income. Let's dive deeper into your portfolio to ensure it aligns well with your financial needs and goals.

Reviewing Your Current Investment Portfolio
1. Investment Allocation:

You have Rs. 75 lakhs in mutual funds, with 90% in dividend payout and 10% in growth. Additionally, Rs. 20 lakhs are invested in bonds. This mix provides a stable income and growth potential.

2. Dependence on Dividends:

Your current dividends suffice your needs, which is excellent. You are comfortable with Systematic Withdrawal Plan (SWP) if needed, indicating flexibility in managing cash flow.

Assessing the Current Portfolio
1. Dividend-Paying Mutual Funds:

Dividend-paying mutual funds are good for generating regular income. However, dividends are not guaranteed and can fluctuate based on fund performance.

2. Growth Mutual Funds:

Growth funds reinvest earnings back into the fund, offering potential for capital appreciation. This is a long-term growth strategy.

3. Bonds:

Bonds provide a stable and predictable income stream. They are less risky compared to equities and add stability to your portfolio.

Analyzing Risks and Benefits
1. Market Risk:

Mutual funds, particularly equity-based ones, are subject to market risk. This means dividends can vary, impacting your income stability.

2. Interest Rate Risk:

Bonds are susceptible to interest rate changes. Rising rates can reduce bond prices, impacting your portfolio value.

3. Inflation Risk:

Your investments should outpace inflation to maintain purchasing power. Growth funds can help counteract inflation over time.

Diversification and Risk Management
1. Diversification Across Asset Classes:

Ensure your investments are spread across various asset classes to manage risk effectively. Your mix of mutual funds and bonds is a good start.

2. Rebalance Periodically:

Regular rebalancing ensures your portfolio stays aligned with your risk tolerance and income needs. This involves adjusting allocations based on market movements.

Advantages of Your Current Strategy
1. Regular Income:

Dividend-paying funds and bonds provide a steady income stream. This is crucial for meeting your regular expenses without needing to sell assets.

2. Growth Potential:

Having a portion in growth funds offers capital appreciation, ensuring your portfolio grows over time. This is vital for long-term sustainability.

Recommendations for Optimization
1. Evaluate Dividend-Paying Funds:

Ensure the funds you hold have a consistent history of paying dividends. Opt for funds with a strong track record and stable performance.

2. Consider Hybrid Funds:

Hybrid funds, which invest in a mix of equities and debt, can provide a balance of income and growth. These can offer more stability compared to pure equity funds.

3. Increase Growth Allocation:

Gradually increasing your growth fund allocation can enhance your portfolio's long-term growth potential. This helps in countering inflation and increasing your corpus.

Role of Systematic Withdrawal Plan (SWP)
1. SWP for Consistent Income:

SWP allows you to withdraw a fixed amount regularly, providing a predictable income stream. This is beneficial if dividend payouts fluctuate.

2. Tax Efficiency:

SWP can be tax-efficient compared to receiving dividends, as you only pay capital gains tax on the withdrawn amount, which can be lower than the dividend distribution tax.

Power of Compounding
1. Growth Funds and Compounding:

Reinvesting earnings in growth funds allows you to benefit from compounding. This means your investments grow exponentially over time.

2. Long-Term Benefits:

The longer you stay invested, the more your money grows. Compounding works best over extended periods, making it a powerful tool for wealth accumulation.

Tax Implications
1. Dividend Distribution Tax (DDT):

Dividends are subject to DDT, which can reduce your net income. SWP can be more tax-efficient, as it spreads out tax liabilities over time.

2. Capital Gains Tax:

Growth funds attract capital gains tax upon redemption. Long-term capital gains are taxed at 10% for amounts exceeding Rs. 1 lakh annually, which is relatively low.

Seeking Professional Guidance
1. Certified Financial Planner (CFP):

A CFP can provide tailored advice based on your unique situation. They help in portfolio management, tax planning, and ensuring your investments align with your goals.

2. Regular Reviews:

Engage with a CFP for periodic portfolio reviews. This ensures your investments remain aligned with your income needs and market conditions.

Final Insights
Your investment strategy is quite sound, given your minimalist lifestyle and income needs. Here are some final insights to consider:

1. Reassess Dividend Funds:

Ensure your dividend-paying funds have a strong performance history. This ensures consistent income even during market downturns.

2. Increase Growth Allocation:

Consider shifting a portion of your investments to growth funds. This enhances long-term growth and helps counter inflation.

3. Explore SWP:

If dividends fluctuate, use SWP for a predictable income stream. It also offers tax efficiency compared to dividends.

4. Stay Diversified:

Continue diversifying across asset classes to manage risk. A balanced mix of equities, debt, and hybrid funds ensures stability and growth.

5. Engage a CFP:

Regularly consult a Certified Financial Planner for personalized advice. They help optimize your portfolio, ensuring it meets your evolving financial needs.

Your approach to financial independence and minimalism is inspiring. With these tweaks, you can ensure a stable and growing income stream, securing your financial well-being.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Asked on - Jul 13, 2024 | Answered on Jul 14, 2024

Thank you ji...

Ans: You're welcome! If you have any more questions or need further assistance, feel free to ask. Best wishes on your financial journey!

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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