Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

To keep principal intact and grow it a bit, have a withdrawal rate lower than fund’s average returns

If you are new to mutual funds, are risk averse, and want to generate regular income from your investment, it is good idea to not invest your entire corpus in mutual funds

I have never invested in mutual funds. I will retire next year and my fixed deposits, PF, and other savings will amount to Rs1.8 crore. I want to invest Rs80 lakh to get a monthly payout of Rs40,000. Which schemes should I invest in? I don’t want to invest my entire retirement corpus as I don’t want to take a lot of risk; but returns should be better than what fixed deposits offer senior citizens.

—Vijay Abhivyakti

Since you are new to mutual funds, are risk averse, and want to generate regular income from your investment, it is good that you are not investing your entire corpus in mutual funds. For your specific need of generating monthly payouts, low-risk short-term debt funds are ideal. Please use systematic withdrawal plan to generate fixed monthly payouts. Ideally, to keep your principal intact and also grow it a bit, your annual rate of withdrawal should be lower than the average returns from the fund. For example, if the fund returns 7%, and your annual withdrawal is, say, 5% or 6%, you allow your corpus to also grow.

Since you need Rs40,000 monthly, it translates into about a 6% annual withdrawal from your fund. That is a realistic expectation. You can consider a mix of ultra short-term and short-term debt funds for this. Consider putting Rs30 lakh each in ultra short-term debt funds from fund houses such as UTI and ICICI Prudential, and Rs20 lakh in HDFC Short Term Opportunities fund. Start your withdrawal from the two ultra short-term debt funds in the first year and then split it between the three from the second year. In each withdrawal you make, one part of the amount is principal and a smaller amount will be the capital gain. The capital gain alone will be taxed at your slab rate for all withdrawals up to 3 years if you are a tax payer. For withdrawals beyond 3 years, you will get indexation benefit. Systematic withdrawal plans will also ensure that you are more tax efficient.

I have invested in the following funds via SIPs: DSP BlackRock Focus 25 Fund-Direct (Rs8,000), Mirae Asset India Opportunities Fund-Direct (Rs10,000), Edelweiss Mid and Small Cap Fund-Direct (Rs5,000), Aditya Birla Sun Life Tax Relief 96-Direct (Rs7,000) and HDFC Balanced Fund (Rs10,000). I need Rs70 lakh for the weddings of my two daughters, which is 10-12 years away. Am I on the right track?

—Uday Shankar

You are currently investing in an SIP portfolio to the tune of Rs40,000 a month. The portfolio allocates 20% to a large-cap fund, 40% to two diversified funds (including a tax saving fund), 25% to a diversified fund, and the remaining in a balanced fund. It’s an aggressive portfolio that’s practically all equity except for a smattering of debt in the balanced fund. Given that you are looking at a time frame of 10 years-plus, these investments may suffice as long as you have the risk tolerance to ride out market volatility without pausing your SIPs.

Regarding the amount of investment, much depends on whether your estimate of Rs70 lakh is in terms of today’s rupees or 10 years from now. Assuming a general inflation of 8%, this requirement would balloon to Rs1.5 crore in 10 years. If that is the case, you need to invest about Rs70,000 a month. But if you are looking at Rs70 lakh in hand in 10 years, your current investment amount would be suitable.

All schemes in your portfolio are well rated, but you would do well to keep an eye on the large-cap as well and the mid- and small-cap fund for consistent performance.

I am a single parent, and want to start investing for my son’s higher education who is 4 years old now. I can invest up to Rs20,000 every month, and increase it to Rs40,000 two years from now. Please suggest a few funds. Also, how can I ensure that all the money goes to my son in case of my untimely demise? My husband has passed away.

—Khushboo Thapa

Let’s first do some math to see how much you are likely to need and how much to invest to get there. Assuming an annual spend of Rs5 lakh for your son’s higher education (in today’s rupees), and factoring in a 6% average annual inflation for education costs, you would need around Rs42 lakh in the next 12-13 years. To get to that corpus in that time frame, if we assume an average compounded annual growth rate (CAGR) of 12%, you would need to invest Rs12,000 a month in a SIP portfolio. Even if we are conservative and lower our returns expectation to 10% CAGR, you would need Rs14,000.

I would suggest an allocation of Rs15,000 at the most in an SIP portfolio. Use the remaining Rs5,000 for a retirement portfolio for yourself. If you need more money for your son’s education, you could use your corpus as supplement. When you add more money to your portfolio, do so towards retirement portfolio.

In all portfolios, name your son as the nominee to ensure that he gets the investments in his name should something unfortunate happen.

In terms of investment choices, you can go with a moderately aggressive portfolio given your time frame and returns expectations for your son’s portfolio. I would recommend a large-cap fund such as Franklin Templeton Bluechip for Rs5,000; a diversified fund in Mirae Asset India Opportunities for Rs3,000; and a mid-cap fund such as L&T India Value fund for Rs2,500. The remaining Rs4,500 in your education portfolio should go to a debt fund such as UTI Short-term Income fund. For your retirement, you can start off by splitting Rs5,000 evenly between the first of these two funds for an aggressive long-term portfolio.

Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com.

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