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Ask Mint Money | Don’t take dividend option if you don’t need regular income

Ask Mint Money | Don’t take dividend option if you don’t need regular income
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First Published: Thu, Jun 02 2011. 08 58 PM IST
Updated: Thu, Jun 02 2011. 08 58 PM IST
I am 30 years old and my income is Rs 8 lakh per annum. I plan to get married by year-end and then go abroad for work for four-five years. I pay Rs 24,000 per month for my home loan. I get Rs 6,000 through rent. I have a traditional policy for which my mother pays an annual premium of Rs 1.2 lakh. I invest Rs 12,000 per month through systematic investment plans in Reliance Equity Diversified Fund (Dividend) and Reliance Small-cap Diversified fund (Growth). Should I convert the dividend fund to growth option? The current value of both funds is Rs 2 lakh and Rs 50,000, respectively. I intend to stop paying premiums for my unit-linked insurance plan (Ulip) since the lock-in period of three years is over. But the new rules mandate the lock-in period to be five years. Do I need to pay premiums for two more years? Ideally, when should I withdraw the money? I want to save Rs 3 crore by the time I turn 45.
—Kannaadh Godse
Considering there are no dependants (your mother pays your insurance premiums), your savings are on the lower side. This is the time when you can build a corpus for yourself. Let the power of compounding work in your favour.
There was no need for you to have insurance. However, now that you have it, continue the traditional plan. The Ulip where you have paid premiums for three years may now be considered open ended and compared likewise with similar products for performance and is to be considered on merit. The lock-in period of five years is not applicable in your Ulip as the change of rule came in much after you took the policy and is applicable prospectively and not retrospectively. But a word of caution: many plans have a high surrender charge even after the lock-in. Read the policy document carefully before arriving at any decision. Coming to your investment in mutual funds, you should not be having investments in dividend option since you don’t need regular income. Hence, all investments should be converted into the growth option (cumulative option). However, a word of caution: any switch you make from dividend to growth will be considered as redemption and hence capital gains will be applicable. Therefore, from the tax planning point of view, make sure you have completed one year from the date of purchase to classify your investments as long-term capital gains.
Lastly, let’s come to your query of saving a corpus of Rs 3 crore: it is not very clear where this number came from. What you should be more concerned about right now is “what’s the maximum I can save” and try to do that. Also, you need to diversify your monthly savings and have three-four funds in your portfolio. You can diversify between equity and equity hybrid asset class.
Queries and views at
mintmoney@livemint.com
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First Published: Thu, Jun 02 2011. 08 58 PM IST