Investing in debt funds for more than 3 years offers tax benefits

Your investments will be taxed at your slab rate for 3 years (from date of investment) and after that you will enjoy long-term capital gains indexation benefit

I am 46 years old and I live in Pune. I have five fixed deposits amounting to Rs12 lakh. I also have an RD going on (Rs12,000 a month). I invest Rs1 lakh in PPF every year. I want to move my money to mutual funds to get better returns. Kindly suggest how much money, and from which specific investments, I should move to mutual funds. I am not comfortable with exposing myself to very high risk, so please limit my equity exposure to not more than 40%. Can you also suggest a few schemes to invest in?

—Ganesh Rane

All your investment choices thus far have been in the asset class of debt instruments—fixed deposits (FDs), recurring deposit (RD), and Public provident Fund (PPF). Getting started with mutual funds will enable your investments to get exposed to the equity market to take advantage of its higher long-term return potential. There are two ways in which you can go about achieving your objective. Mutual funds can be used for debt as well as equity investments. So, you can use either your current deposits as the debt instruments in your overall portfolio, or you can use mutual funds for both debt and equity investments. The advantage in the latter method is the tax benefit of indexation that you get for investing for more than 3 years in debt mutual funds (indexation will lower your taxable capital gains and hence lower your tax outgo).

Of the three investments you are making, the choice about PPF is clear. If you want to invest 40% in an equity oriented instrument that also gets you tax deductibility (like PPF does), you can simply invest Rs40,000 in an equity-linked savings scheme (ELSS) such as ICICI Prudential Long-term Equity fund. For your other investments, a large-cap fund such as Aditya Birla Sun Life Frontline Equity fund and a diversified fund such as Franklin India Prima Plus fund will be good choices. You can take Rs5 lakh from your FD corpus and Rs5,000 from your monthly investment outflow and split the amounts between these funds to balance out your overall portfolio with equity investments. If you choose to move your entire deposit over to mutual funds, the remaining amounts (Rs7 lakh from FD and Rs7,000 from monthly investment) can be invested into debt funds such as HDFC Regular Savings fund and ICICI Prudential Short Term fund.

I am a public servant and retire next year. From all my savings, investments and the retirement corpus, I will get about Rs2.3 crore. My monthly expenses are Rs55,000 a month. After taking away money for my daughter’s and son’s marriages, I will have Rs1.5 crore left. I want to invest this in mutual funds to create an income stream for regular payout every month. How much monthly payout can I expect? I also have rental income.

—Pranav Dubey

With mutual funds, systematic withdrawal plan (SWP) is the ideal way to go to ensure that you create your own reliable and regular income stream. While one can withdraw any amount (by automating the redemption every month), the ideal way is to withdraw based on the return capacity of the investment portfolio. For example, if a portfolio has delivered 8% on an average over several years, then you should ensure that your withdrawal is restricted to 8% (divided by 12 for monthly withdrawals). This way you will ensure that your corpus is not depleted. In your case, for a Rs1.5 crore-corpus, assuming a 7% return from short-term debt funds, you will be able to comfortably withdraw the money you need for monthly expenses. If you have rental income, then Rs55,000 minus this rent should be your withdrawal amount. Fix this as the monthly withdrawal for the first year and gradually increase it by 6-7% every year (to account for inflation). You should be able to keep your corpus intact and actually grow it reasonably. You can consider a combination of ultra short-term and short-term debt funds and redeem from the former first and use the latter after 2 years. Please note that of the amount redeemed, a part will be capital gains. This will be taxed at your slab rate for 3 years (from date of investment) and after that you will enjoy long-term capital gains indexation benefit and a tax of 20% after such indexation of cost, which will bring down your tax outgo.

Srikanth Meenakshi is co-founder and COO,

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