Use a mix of FDs, short-term debt MFs for goals that are near
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I am 45 and earn Rs.1.7 lakh a month. I am expecting a salary hike of about 20% this year. I put in Rs.5,000 a month for a life cover, and in total, I have invested about Rs.1.5 lakh across three equity mutual funds (MFs). Further, I have another Rs.15 lakh in two fixed deposits, and Rs.10 lakh in my savings bank account. I want to buy a house in another 10 years, and I need around Rs.15 lakh for this. My monthly expenses come to Rs.50,000 a month. Can you suggest an investment plan for me?
Your potential to save is quite good. One way to begin could be to just start investing. But it may not be the best of strategies and that’s what you have been doing with your investments. A better way would be to determine your financial goals and categorise them as short- and long-term needs. Next step would be understanding your risk tolerance level—how much risk you can take based on your financials and risk appetite, and how much risk you are willing to take. There are many online questionnaires available that can help in determining your risk tolerance, especially risk appetite. A simple question could be “how would you react if investments meant for the long term go down by 20% within six months of your investment?” Your reaction would determine your appetite. If you cut your losses and transfer investments to safer asset classes, then you have a low risk appetite. On the other hand, if you know these asset classes come with inherent volatility and accept decline in portfolio value as a part of investing and therefore keep the investments the way they are, it means you have high risk appetite. In such a case, only the investments meant for long-term goals will be invested in asset classes with high risk.
Let’s look at your asset classes. Starting with insurance, ensure that you have a term policy that covers you for 7-8 times of your annual income. This is done primarily to protect your family. And if you subsequently go for a housing loan, the same should also be covered separately with a term insurance.
Your existing investments are made in fixed deposits (FDs), when there are no immediate goals and where prima facie the goal is to buy a house in 10 years. The interest earned on these deposits is at best able to match the inflation rate, but not beat it. This is when you come under the highest tax bracket and the interest is not even adjusted with the tax rate. Also, keeping such a large sum of money in a savings account is not recommended.
As a thumb rule, keep monthly expenses of 3-4 months as bank balance. Here too, convert your bank account into an FD-linked account where you get a rate little better than a simple savings account. Start monthly savings via systematic investment plans. If the goals are long term, do look at equity MFs as an asset class subject to your risk profile and for short-term goals, you may go for a combination of FDs and short- term debt MFs.
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