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Senior Citizen Selling Property: How to Secure Monthly Income and Capital Appreciation?

Ramalingam Kalirajan |7167 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 14, 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 Sudhir on Aug 01, 2024Hindi

Madam, I am selling a property for 1.10 cr, Out of which 60 lakh is capital gain. Pls suggest me mix of Mutual Fund(SWP)and CG Investment scheme(For saving LTCG). So that I could earn atleast 40000 per month for rent along with capital appreciation. Thank You.

Ans: Selling your property for Rs 1.10 crore and realizing a capital gain of Rs 60 lakh offers you an excellent opportunity to achieve both capital appreciation and a steady income stream. You’ve set a clear objective to earn at least Rs 40,000 per month, which equates to Rs 4.8 lakh annually, along with capital appreciation. Here’s a comprehensive plan to achieve this goal.

Step 1: Saving Long-Term Capital Gains (LTCG) Tax
Investment in Capital Gain Bonds

Section 54EC Bonds: Investing in specified bonds under Section 54EC is a tax-efficient way to save on LTCG tax. These bonds have a 5-year lock-in period and offer an interest rate of approximately 5% to 6% annually. Given that your capital gain is Rs 60 lakh, you can invest up to Rs 50 lakh in these bonds.

Lock-in Period: These bonds have a 5-year lock-in, so liquidity is restricted. However, the interest earned can be a steady source of income, though it is subject to tax.

Safety and Security: These bonds are issued by government-backed institutions, making them a safe investment with minimal risk.

Alternative to Capital Gain Bonds

If you prefer liquidity and potential growth, you could consider other tax-saving options like investing in a new residential property under Section 54F. However, given your preference for mutual funds and SWP, the following strategies would be more aligned with your goals.

Step 2: Systematic Withdrawal Plan (SWP) from Mutual Funds
Building a Balanced Portfolio

To generate a monthly income of Rs 40,000 while aiming for capital appreciation, a well-diversified portfolio is essential. Here's a suggested allocation:

Equity Mutual Funds: Allocate 60% of your funds to equity mutual funds. Equity funds are essential for capital appreciation over the long term. Given your objective of earning a stable income, select diversified equity funds that have a good track record and focus on large-cap and multi-cap companies.

Debt Mutual Funds: Allocate 40% to debt mutual funds. Debt funds provide stability and reduce the overall risk of your portfolio. They generate steady returns and are less volatile than equity funds.

SWP Strategy for Monthly Income

Systematic Withdrawal Plan (SWP): SWP allows you to withdraw a fixed amount regularly from your mutual fund investments. This is an ideal way to generate a regular income while allowing your capital to grow.

Monthly Withdrawal: Set up an SWP from your debt mutual funds. Given the allocation, Rs 40,000 per month can be withdrawn systematically. The remaining funds in equity will continue to grow, offering potential capital appreciation.

Tax Efficiency: The SWP is tax-efficient as each withdrawal is considered a partial redemption of units, so only the gains are taxed. This reduces your overall tax liability compared to withdrawing lump sums.

Step 3: Detailed Investment Allocation
Equity Mutual Funds

Large-Cap Funds: These funds invest in well-established companies with a history of consistent performance. They are less volatile and provide steady growth. Consider allocating 30% of your equity funds to large-cap funds.

Multi-Cap Funds: These funds offer exposure to companies across different market capitalizations, balancing growth and risk. Allocate 20% to multi-cap funds.

Hybrid Funds: Hybrid funds invest in both equity and debt, providing a balanced approach with reduced risk. Consider allocating 10% to hybrid funds.

Debt Mutual Funds

Short-Term Debt Funds: These funds invest in short-duration bonds and are less sensitive to interest rate changes. They provide stable returns with minimal risk. Allocate 20% to short-term debt funds.

Corporate Bond Funds: These funds invest in high-quality corporate bonds, offering higher returns than government securities with a moderate risk profile. Allocate 20% to corporate bond funds.

Setting Up SWP

Withdrawal Calculation: For a monthly withdrawal of Rs 40,000, an initial investment of Rs 60 lakh in the suggested debt and hybrid funds could sustain the withdrawal while allowing the equity portion to grow.

Start SWP: Begin SWP from the debt funds to ensure that you are not disturbing the equity portion, which needs time to grow and generate capital appreciation.

Step 4: Monitoring and Rebalancing
Regular Review

Quarterly Monitoring: Review your portfolio every quarter to ensure it aligns with your financial goals. This will help in making necessary adjustments based on market conditions.

Rebalancing: If equity markets perform well, consider rebalancing by shifting some gains from equity to debt. This ensures your portfolio remains balanced and aligned with your risk profile.

Risk Management

Diversification: Diversifying across different asset classes and within equity and debt ensures that you are not overly exposed to any single risk.

Market Volatility: While equity funds offer higher returns, they are also subject to market volatility. The debt allocation in your portfolio will cushion against market downturns.

Final Insights
Capital Gains Bonds: Invest Rs 50 lakh in capital gains bonds under Section 54EC to save on LTCG tax.

Balanced Portfolio: Allocate 60% to equity funds for capital appreciation and 40% to debt funds for stability.

SWP Setup: Set up an SWP from debt funds to withdraw Rs 40,000 monthly, ensuring a steady income without compromising on capital growth.

Regular Monitoring: Review and rebalance your portfolio quarterly to stay on track with your financial goals.

This comprehensive strategy will help you achieve your financial objectives while balancing growth, income, and risk.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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.