Ask us: On investments
Q. I am 22. Once my father retires from the State electricity board he will get pension, a lump sum amount and other benefits. How can he invest to gain financial autonomy?
A. In the following suggestions where mutual fund is mentioned, use them sparingly and only if your father’s pension, by itself, entirely covers his monthly expenses. Else, stick to the other options elaborated.
Create an emergency corpus of 3-6 months’ expenses. These must be partly in bank savings account and the rest in short-term FDs of six months to one year so that you can break them any time. Then, explore the following:
Senior Citizens’ Savings Scheme (SCSS) and the government’s pension scheme PM Vaya Vandana Yojana (PM VVY through LIC), will be the top options. He can invest a maximum of ₹15 lakh in each. Note PMVVY’s rate will change post March 2021 but that is ok. Rates will still be better than that on FDs. The third option is RBI Floating Rate Bonds with a lock-in of 7 years, with interest payout. There is no maximum limit in this. All these options will generate regular income for your father and importantly, provide full capital safety. The income from all of them will be taxable at his slab rate.
Beyond this, two optional investments he could consider are quality corporate deposits from top non-banking financial companies such as the HDFC or the Sundaram Group. At present, the rates are not attractive but if they do get better in a year’s time, you could consider them.
The final option, which should account for a small chunk and that too only if your father understands them (and has adequate income), is debt mutual funds (MFs).
Look at a minimum three-year period to invest in corporate bonds or banking and PSU debt funds. These will have quality papers, with marginally higher returns than FDs, and tax efficiency (if he is in the 20-30% tax slab). The returns are not fixed or guaranteed. So, there is definitely some risk here. Use the first three options well and keep corporate deposits and MFs as the last option for small diversification if the corpus is large.
Q. I am a 23-year-old mechanical engineer with a monthly salary of ₹25,000. My dad is retired and gets a monthly pension of about ₹30,000. At present, our total monthly investments are — ₹5,000 in equity mutual fund, ₹5,000 in RD with 6% interest and ₹10,000 in gold chit funds. How can I diversify my portfolio and improve returns?
A. It is good to know you are saving early. Just to maintain your father’s financial independence, try and keep both your savings distinct so that the risk-taking ability for both is demarked and he need not depend on his children in future. For your father, if he has any lump sum invested in FDs, he could shift some to avenues such as Senior Citizens’ Savings Scheme (available in post office/SBI and other PSU banks) and also consider RBI Floating Rate Bonds. These will provide the much-needed safety of capital and regular income to augment his pension income, if he needs more in future.
As for you, equity funds and RDs are good, provided you don’t lock into long periods in FD in this current low-interest scenario. You can keep it short (one year) and renew it. Your overall portfolio has 50% in gold, which is a considerably high exposure and that too, through less regulated or unregulated avenues. Reduce gold to 15-20% and raise your equity component to 50-60%. Financial savings in gold through gold funds or bonds are better options than gold chit funds that are risky and have hidden costs. For equity, have a time frame of not less than 7 years. In the years in between, be prepared for low returns or even negative returns.
(The author is co-founder, Primeinvestor.in)
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