Taxation becomes important to determine the investment’s efficiency
My mother is 59 years old, and a widow. My father passed away in September 2015. He had made some investments. How can I re-invest on my mother’s behalf? She needs monthly income for household expenses and needs to build a consolidated portfolio. She has no liabilities. My mother’s healthcare expenses are covered as my father was employed with a public sector company. The amount available is around Rs.1.2 crore. Present investments are worth Rs.86 lakh— Rs.40-45 lakh in fixed deposits (FDs); Rs.30 lakh in Birla Capital Protection Fund; Rs.3 lakh in National Savings Certificate (NSC) for FY2015-16; Rs.4.5 lakh in post office monthly income scheme; Rs.2 lakh in Kisan Vikas Patra (KVP); and Rs. 1.5 lakh in Public Provident Fund for FY2015-16.
Her present monthly cash inflow is Rs.62,000 (Rs.30,000 rental income, Rs.17,000 from an insurance policy, and Rs.15,000 from my father’s pension). She needs about Rs.25,000 as monthly outflow, Rs.26,000 quarterly as society charges for two houses, and i ncome tax payment to be done on behalf of my father.
The main objectives are preservation and growth of capital along with ensuring regular income.
There are three asset blocks—existing corpus, corpus to be invested and real estate. There is also a surplus that gets generated every month from rental income.
Income from existing investments clubbed together gets taxed in the hands of one person. So, planning is important. This asset block constitutes of fixed income, so it has high safety but low returns. Liquidity is high in FDs. PPF is the other investment that scores high on safety and tax efficiency but has a longer maturity and lock-in. Taxation is important to determine the investment’s efficiency. So returns post-tax are important. The corpus has to be adjusted for inflation.
You also have a capital protection fund, which comes with a lock-in period, typically of more than three years, where 75-80% is invested in debt securities and 20-25% in equities. The rationale is that since the investment has to be held till maturity (no surrender is allowed), the debt portfolio in line with the interest rate will become 100% of principal invested in three years, thereby protecting capital, while equity generates a return better than an FD. This product can be considered by risk-averse investors. But a better strategy would be to consider 75% in debt securities and the balance in open-ended equity mutual funds. In case of underperformance, you will have an option to switch or redeem and reinvest the same, unlike in the capital protection scheme, which has a lock-in stipulation. Here, too, capital protection is ensured—75% invested in debt becomes 100% in three years with equity giving overall returns.
The above principles should be used to invest available funds. The monthly surplus from rental income should also be invested every month via recurring deposit or a systematic investment plan.
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