BackAsk Mint Money | Fixed deposits are good for those in the lower tax bracket
Ask Mint Money | Fixed deposits are good for those in the lower tax bracket
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I am 26 years old and in a government job. My gross salary is around ₹ 40,000 and I expect a hike of ₹ 10,000. Which avenues will help me invest and save tax?
—Rohit Sharma
It is good to see you want to start saving early. As you are young and it is assumed you don’t have any responsibility, you should look at higher exposure to equity. This also comes with a rider: you need to make sure that the investment allocated to equity has a long-term horizon. In case of short-term needs, the allocation should be more in debt instruments.
You can consider ELSS (equity-linked saving scheme) as an asset class for saving tax as it also gives you exposure to equity. In addition, you can go for infrastructure bonds, which are also eligible for tax saving. However, this is a debt investment with a long lock-in period. In case you don’t have medical benefits, you can consider taking health insurance. Besides its apparent advantages, it also helps you save tax.
In addition to tax-saving investments, you should also consider starting a monthly investment plan. One of the recommended ways to do that is starting a systematic investment plan (SIP) in mutual funds. You can consider two funds to start your investment. Diversified and hybrid equity-based funds may suit you. The first gives high equity exposure and the latter partial exposure to debt.
I am 24 years old and my parents passed away a few years ago. I have about ₹ 50 lakh of liquid funds that I plan to invest. I will need about ₹ 20 lakh for further education in a year or two. I don’t have any other liability. My monthly salary is ₹ 30,000. Where should I park my inherited funds? Should I invest in a mix of debt and equity funds along with fixed deposit (FD)? Should I park my funds in a debt fund and do a systematic transfer plan (STP) or keep the money in a sweep-in account and opt for an SIP in equity funds? What would be the right SIP amount? How many funds should I have? Suggest some good funds.
—Ramesh Paradkar
You have inherited a good sum of money, which you should invest with utmost care and responsibility.
As per your needs, you can break your corpus in two parts—education which can be defined as a short-term goal and others which we can safely classify as long-term. The education corpus, being short term, is to be invested in secure assets that are reasonably liquid. Options such as FD with 1-2 years’ tenor, fixed maturity plans and monthly income plans should be considered for creating this corpus. Since your marginal tax rate is in the lower tax bracket as of now, you will get a higher post-tax yield from these instruments.
Coming to your long-term needs, STP and SIP is recommended. It is difficult to choose between the two and the criteria that should be used is the better performing parking schemes—liquid schemes in STP or sweep-in account for SIP.
You should not have many funds in your portfolio. Pick around 4-5 funds in total. Each fund can represent a different asset class. For example, large-cap, diversified, mid-cap and hybrid funds can form your portfolio.
As you have a long-term horizon, you can spread the investment in these funds over 4-5 years. In other words, the SIP/STP can be spread over this period. You can even consider locking in your debt funds and releasing it before they become due for their respective STP or SIP.
Along with these funds, you can have debt in the portfolio and FDs are a good option. However, FDs may not remain a good option once your salary increases after you complete your higher studies. Also, open a Public Provident Fund account as a long-term investment. Lastly, consider investing in health insurance for yourself.
Queries and views at mintmoney@livemint.com
Surya Bhatia , Certified financial planner and principal consultant, Asset Managers
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