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Photo: iStock

If total income is not taxable, senior citizens should keep bulk of their money in fixed deposits

When it comes to an elderly person with a low risk appetite, the advantages mutual funds offer don't look attractive considering that the bulk of the investments are likely to be in debt funds

My father is 69 years old and has about Rs12 lakh in fixed deposits. How can we best invest it in different mutual funds or other products? Please give an example of the asset allocation. Risk appetite is low at this age. I invest in mutual funds but that is about Rs15,000 a month.

—Abhishek Gupta

There are two reasons to prefer mutual funds over fixed deposits—one is the potential for better returns, and the other is for a more advantageous tax treatment. However, when it comes to an elderly person with a low risk appetite, these advantages don't look attractive considering that the bulk of the investments are likely to be in debt funds. With this class of funds, the pre-tax returns differential is likely to be low and not sufficient to compensate for the additional risk incurred by investing in mutual funds that do not guarantee returns the way fixed deposits do.

Apart from this, for a sum of Rs12 lakh, the amount of interest per year from a fixed deposit would be well below the threshold of lowest income-tax slab. This means that taxation is likely not a concern (unless there are other sources of income that result in your father coming into the category of taxpayer). If he can take on some risk—and belongs to a tax bracket, and can invest his money for at least 3 years (when tax benefits would accrue)—then he could consider investing some part of his corpus in short-term debt funds.

Else, the best option would be to keep bulk of his money in fixed deposits, and take probably 10-20% of his corpus (say, around Rs2 lakh) and invest it in a balanced fund to get a higher return over a period of 3-5 years.

I have been investing monthly in mutual funds via systematic investment plans (SIPs) for the past 1 year, in these funds: Rs5,000 each in direct plans of Franklin India High Growth fund (G) and SBI Blue chip fund (G), and Rs10,000 in direct plan of Mirae Asset Emerging Blue-chip (G). I want to increase my SIPs by Rs10,000. Kindly suggest some good funds.

—Gaurav Jha

Out of the Rs20,000 you are investing presently, most of the investment is going towards the mid- and small-cap segments of the market. Two of your funds (Franklin and Mirae Asset) are explicitly set up to focus on this part of the market. Even the third fund, a blue-chip fund, has sizeable (20%) allocation to the mid-cap segment. So, close to 80% of your portfolio is presently directed at this high-risk segment where the valuations are very high presently. The fact that you are bringing in some fresh money into your portfolio gives you an opportunity to remedy this situation. It also presents an opportunity for creating an asset-level balance to your investments. Of the Rs10,000 of the additional money that you are adding to your monthly investment, I would recommend that you invest Rs5,000 in a pure large-cap fund such as Franklin India Blue-chip fund. The other Rs5,000 should go to a short-term debt fund such as HDFC Regular Savings fund. Also, from your existing investments, you should split the Mirae Asset investment into two parts—keep Rs5,000 in the current mid-cap fund, and allocate the other Rs5,000 to a diversified fund from the same fund house (say, Mirae Asset India Opportunities fund).

If you make these moves in your portfolio, you will end up with a third of your money going to large-cap funds, a third going to mid-cap funds, and the remaining split between a diversified fund and a debt allocation. This would represent a more balanced and more diversified investment strategy for your regular monthly investments.

I am 21. I have been investing for 3 months. My current investment through SIP is Rs3,000. I want to double my investment and want a return of at least 18% in the long run. My current portfolio is: DSP Black Rock Natural Resources and New Energy fund (Rs500); L&T Emerging Businesses fund (G) (Rs500); Motilal Oswal Most Focused 35 fund - direct (G) (Rs2,000); By March 2020, I will be able to invest around Rs30,000 per month.

—Name withheld on request

You are investing Rs3,000 a month today and plan to invest 10 times as much every month in about 2 years. I assume this is due to some loan or such obligation that you are servicing presently that will abate within 2 years, freeing up money for investment. If that is the case and you find yourself in a situation in which you can invest Rs30,000 a month in 2 years, you should do a complete portfolio design exercise at that time. Right now, I would keep to offering a couple of comments: one on your portfolio and one on your returns expectation. In your portfolio, you have a thematic fund and although it is only Rs500 a month, it represents 15% of your small-sized portfolio. I would recommend that you move that to a large-cap fund such as DSP Blackrock Top 100 in its stead. And, the expectation of 18% annual return from your portfolio is definitely on the higher side. At best, you can expect about 12% long-term average return even from an aggressive portfolio. If you expect more than that and plan for that, you would set yourself up for not meeting your goals as per your plan.

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

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