In the weekly personal finance call-in show, Smart Money, by Mint along with Bloomberg TV India, host Vivek Law, editor, Bloomberg TV India, was in conversation this week with Monika Halan, editor, Mint Money, on whether inflation indexed bonds would make sense for investors. Here is the edited transcript of the show that was aired over the weekend on Bloomberg TV India.
Vivek: What are inflation indexed bonds and do they make sense for investors? What about tax-free bonds?
Monika: Let’s take tax-free bonds first. These are really good instruments for people in the highest tax bracket, who are looking at an annual income. These are typically for people, such as the retired and senior citizens with a corpus, who look for a long-term vehicle to park that money in. While fixed deposits (FDs) are an option, these have the tax advantage. These are currently giving around 7.5% and when the new tranche of bonds come, they will give you about 7% year-on-year for 15 years.
The inflation indexed bonds are interesting products. The Reserve Bank of India (RBI) has experimented with these twice before in 1997 and 2004. As a fixed return investor for the long term, your money gets affected by inflation. So suppose you are putting in Rs.50 lakh into a product which will give fixed returns after 10-15 years, its value will be reduced by half due to inflation. But ideally your Rs. 50 lakh should grow. The problem (in the earlier bonds) was that they linked it to the wholesale price index but what impacts is really the consumer price index; as consumers of products and services we are seeing a household budget inflation of 10-15%. I think it’s really crucial that RBI gets the bond and benchmark right. These are the two things which probably will make for the success or the failure of the third issue of these inflation indexed bonds.
Vivek: Chetana you have been putting in money month after month already. I think you started well early. We have your portfolio but do you have any specific questions?
Chetana: Yes, the main concern is my child’s education, considering that education is actually getting costlier day by day. I wanted to check whether the funds in my portfolio are structured correctly to cater to his education.
Monika: There are things that I like in your portfolio, but there are a couple of things that I dislike. Your positives are that your expenses are under control, more than 60% of your income is getting saved, you have got your Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) in place and you have systematic investment plans (SIPs) of more than Rs.6 lakh a year. You have got a big chunk sitting in FDs. My usual grouse to callers is that you don’t have enough life cover or the wrong kind of life cover and not enough medical cover. Both those are true for you as well. Between you and your husband, you should have simple term life cover of up to Rs.1.5 crore. Your company gives you medical insurance but you need your own cover, too.
Your first goal is saving for your son. You said that you want about Rs.30 lakh in 10-12 years. I would suggest that when your FDs come up for renewal, you could look at breaking them down into smaller bits. So keep Rs.10-15 lakh of comfort money but if you do want a bit of extra return, you can invest in a balanced fund with a small equity kicker; 10-25% of equity allocation will not put your principal at risk. Choose from Mint50.
You have got good funds but you need to pick up 6-8 funds. Two large-cap, two balanced and two mid-cap funds if you can take that risk.
Chetana: How frequently should I be reviewing my portfolio once I get the right mix?
Monika: See Mint50 is a portfolio we review twice a year as we don’t like to churn too much. We look if there has been a fund manager change or if a fund has really lost steam.
Vivek: Prashant, how do you manage to spend just Rs.15,000?
Monika: Prashant, when I look at your portfolio, I see a very risk averse guy. You don’t like too many surprises in life. Is that correct?
Monika: We will try and de-risk your portfolio a bit with insurance. A life cover will give you that confidence. Normally, looking at your income, I would have suggested Rs.1 crore of life cover but because you are so risk averse, may be you should consider Rs.50,000 lakh more. You can buy a cover worth Rs.1 crore now. Since you are just 31, it won’t cost you much. Next year buy a cover of another Rs.50 lakh. You have a good medical cover from your company but it’s not enough simply because we change jobs. I would suggest a Rs.5-6 lakh family floater for you, your wife and child. Review that cover when you turn 37-38. For your parents I see that medical insurance is running out at 60-65. Look for a lifelong cover for them. The Rs.6 lakh in your savings account can be broken up into two Rs.2 lakh FDs. You need to open two PPF accounts for yourself and your wife. Credit it with Rs.1 lakh each every year, so that’s Rs.2 lakh gone. Your surplus is about Rs.5 lakh and you have Rs.3 lakh left to invest every year. You can also look at a balanced fund with not more than 25% equity exposure because you do not like risk. As you get more comfortable, you could look at increasing that equity allocation but remember the money is meant to keep you mentally free about your money life worries, so take it slowly.
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