I am 41 years old with an annual business income of Rs.6.5 lakh after tax. I also receive Rs.2.49 lakh net from my fixed deposits, or FDs, (Rs.30 lakh invested in 2011 for 10 years at 9.25%). I require Rs.70 lakh (future value) in 2023 for my child’s education, Rs.2.5 crore (future value) for retirement in 2026 and a car worth Rs.8 lakh in 2015. Since June 2011, I invest the full FD interest into monthly systematic investment plans (SIPs) of Rs.10,000 each in Reliance Equity Opportunity and ICICI Focused Bluechip. Is this a good strategy or should I break the FD and invest in MFs? I have adequate insurance and my monthly expenses are Rs.30,000, including school fees. I have a Public Provident Fund (PPF) in which I put Rs.70,000 since 2010 and have no loans.
Your existing savings of Rs.30 lakh will not suffice to achieve the targeted goals. You need to increase your savings; we have taken Rs.30,000 as monthly savings in addition to the FD interest. This is based on the surplus income you have over expenses. Also, your annual savings need to grow by 10% and the rate of interest is assumed as 10%. The opening corpus is taken as Rs.30 lakh, including the PPF deposits. Subject to the above, you should be able to achieve your desired targets. However, we have pushed the retirement age of 55 years to 58 years. The key in achieving the above is regular saving.
As you have already taken the future value for your goals, you need to ensure the inflation rate taken is adjusted at periodic intervals as this along with the interest rate (earnings on corpus) can be game-changers.
The strategy of transferring the FD interest income to equity SIPs works well for investors with conservative or moderate risk appetite. You need to check your appetite of taking risk. In case you can’t, you will need to bring down the assumed average earnings rate of 10% to a more realistic number considering your investments.
In the current scenario, you are earning 9.25% and there is 10% tax deducted at source (TDS). Hence, you are getting 8.32% in case you are not paying more taxes. It may be prudent to reinvest the same. While you need to increase your equity allocation, there are other asset classes where you can reinvest. You can invest in short- and medium-term debt mutual funds. Funds such as Templeton Short Term Income Fund, Birla Sun Life Dynamic Bond Fund have a good track record. You can also look at monthly income plans, where Reliance MIP has been a consistent performer. Hybrid funds where Tata Balanced and HDFC Balanced have done well should also be considered. You can continue investing in your equity SIPs as both the funds have done well.
With PPF in your basket and insurance already provided for (ensure it is both life and health), you should be able to achieve the desired results.
Queries and views at email@example.com