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Ramalingam Kalirajan |6623 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 15, 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 Krishna on Oct 14, 2024Hindi

What is the best investment plan to invest lumsum amount 15 Lacks

Ans: It is great that you are thinking about making a lump sum investment of Rs 15 lakhs. Before proceeding, let’s assess your current financial situation. At age 37, your PF balance stands at Rs 4 lakhs, and your monthly contribution to PF is Rs 4,000. Additionally, you hold LIC policies with a premium of Rs 50,000 per annum. These elements are important to consider when planning any new investment.

Setting Clear Financial Goals
Before selecting the best investment plan, it’s essential to define your financial goals. You’ve mentioned an interest in achieving Rs 1 crore. Clarifying your timeline for this goal will help determine the right investment strategy.

Ask yourself:

What is the time horizon for reaching Rs 1 crore? This will influence the type of investments, with long-term goals allowing more aggressive strategies.

What are your other financial goals? If you have additional goals like retirement planning, children's education, or buying assets, you should account for those as well.

What is your risk appetite? Higher returns usually come with higher risk. It’s important to assess how much risk you’re willing to take, keeping in mind that you need a balance between wealth creation and capital protection.

Importance of a Diversified Investment Portfolio
A diversified investment portfolio is the key to achieving your financial goals. Diversification reduces risk by spreading your investment across different asset classes such as equity, debt, and other financial instruments. Your Rs 15 lakhs lump sum can be distributed across multiple investment avenues based on your financial goals and risk tolerance.

Allocating to Actively Managed Mutual Funds
Equity Mutual Funds are a good choice for long-term wealth creation. Over time, they have the potential to outperform fixed-income instruments. However, avoid index funds or ETFs in this case, as actively managed funds often generate better returns.

Actively managed funds have the advantage of professional fund management and flexibility to adapt to market conditions.

A Certified Financial Planner (CFP) can help you select the best actively managed funds according to your financial goals, without relying on passive strategies like index funds that often underperform in volatile markets.

Balanced Advantage Funds (BAFs) are a great option if you’re looking for both equity exposure and some level of capital protection. These funds dynamically allocate your investment between equity and debt based on market conditions, reducing volatility.

Debt Funds for Stability and Short-Term Needs
While equity mutual funds are great for long-term growth, it’s wise to balance your portfolio with debt mutual funds for stability.

Debt funds can offer steady, inflation-beating returns, especially if your risk appetite is moderate. These funds can be a part of your portfolio if you want to maintain liquidity and avoid extreme market volatility.

Keep in mind the taxation on debt funds: the capital gains are taxed according to your income tax slab. So, it’s essential to keep a long-term perspective to reduce the impact of short-term capital gains taxation.

Public Provident Fund (PPF) as a Long-Term Option
You’ve mentioned an interest in investing in PPF. This is a good option for safe, long-term savings. Given your age of 37, if you can commit to the 15-year lock-in period of PPF, it will provide a stable return and tax-free interest. However, since PPF returns are relatively lower compared to equity, it should only be a part of your portfolio for capital preservation and tax benefits.

A PPF contribution of up to Rs 1.5 lakhs annually will give you a tax deduction under Section 80C, which complements your EPF contributions.

Given that your PF balance is Rs 4 lakhs, contributing to PPF can also serve as a safe backup for your retirement plan.

The key is to balance PPF with more growth-oriented investments like equity funds for higher returns.

Revisiting Your LIC Policies
You are currently paying Rs 50,000 annually for LIC policies. While traditional insurance plans are safe, they often offer low returns, especially when compared to mutual funds.

Evaluate your current policies: If the primary objective of these policies is insurance, you may want to consider term insurance for pure protection. Traditional plans with investment components tend to deliver sub-optimal returns over the long term.

Consider surrendering these policies if they do not align with your wealth creation goals and instead invest the amount in high-performing mutual funds. However, you must carefully check the surrender value, penalties, and tax implications before making this decision.

Emergency Fund and Liquidity
Before making any lump sum investment, ensure you have an emergency fund in place. This fund should cover 6-12 months’ worth of living expenses.

Set aside a portion of your Rs 15 lakhs for an emergency fund. You can park this in liquid funds or a fixed deposit for easy access. It’s essential not to tie up all your funds in long-term instruments without maintaining liquidity for unforeseen expenses.
Role of Professional Guidance
Investing a large lump sum like Rs 15 lakhs can be overwhelming without professional guidance. You’ve done well by seeking advice. Consulting a Certified Financial Planner (CFP) is the right approach, as they can tailor a strategy based on your unique financial situation. A CFP can assist in selecting the right funds, balancing your risk and return, and keeping your financial goals on track.

Active Management vs. Direct Funds
Avoid the temptation to invest in direct mutual funds unless you have the expertise and time to manage them actively. Investing through an MFD with CFP credentials gives you access to professional guidance.

Direct funds might offer lower expense ratios, but they come with the burden of self-management. Many investors underperform due to lack of expertise in managing market timing, fund selection, and rebalancing.

Regular funds, on the other hand, come with the benefit of a fund manager and access to expert insights. The slightly higher fees are often justified by better long-term returns due to active management and market insights.

Tax Implications
Be mindful of the tax implications of your investments. As per the latest rules:

Equity Mutual Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%, while short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: Both LTCG and STCG are taxed as per your income tax slab.

Tax planning is an integral part of your investment strategy. A good CFP can help you optimise your portfolio to minimise taxes while maximising returns.

Regular Monitoring and Rebalancing
Once you’ve invested, regular monitoring and rebalancing are crucial. As market conditions change, you’ll need to adjust your portfolio to stay aligned with your goals.

Regular rebalancing helps maintain your target asset allocation between equity and debt. If one asset class grows faster than the other, rebalancing ensures that your portfolio doesn’t become riskier than intended.

A Certified Financial Planner (CFP) can help with this process and make sure you stay on track, adjusting your investments as needed based on market conditions and life changes.

Final Insights
Achieving Rs 1 crore or more through investments requires a well-thought-out strategy. By investing your Rs 15 lakhs across a mix of actively managed equity mutual funds, debt funds, and PPF, you can aim for a balanced portfolio that meets your long-term financial goals.

Don’t forget the importance of having an emergency fund, evaluating your LIC policies, and getting professional help to optimise your investment journey. A diversified portfolio, regular monitoring, and staying focused on your goals will help you grow your wealth over time.

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.