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Please ask your questions HERE and rediffGURU Janak Patel, a certified financial planner accredited by the Financial Planning Standards Board, India, and CEO and founder of InfiniumWealth, will answer them.
Hello Janak Sir, hope you are doing well. I am 43 year old having 2 daughter 13 and 4 year. Currently I am having 75 lakhs in MF, 20 lakhs in FD, around 26 lakhs in PF and around 5 lakhs in other investments.
I have 2 houses one is loan free and getting rent for 10,000 pm from it. For other flat where I am residing 29 lakhs loan is pending and also having 6 lakhs loan for car.
I am investigating 55,000 in MF per month. I have in hand income of 2,80,000.
My questions is should I start paying loan fast for home loan (7 per) and car loan (9.2 per) by paying on lump sum to become debt free in 4 -5 year or increase SIP in MF?
Your Financials look reasonably good even with some liabilities. Your liabilities stand at about 28% of your assets and 12.5 times your income, which is a healthy ratio by itself.
Your PF amount should not be considered for the purpose you have mentioned and let it remain for retirement. This amount may be earning about 8%, but it's completely tax exempt and you should only think to withdraw post retirement.
You have mentioned 5 lakhs in other investments, you will need to evaluate these for liquidity and returns to support the below recommendations. If they are earning better returns than loan rates mentioned then do continue, else you can consider to liquidate and service the loan.
Car Loan:
Your car loan of 6 lakhs is at 9.2%, which I am sure is higher than the returns on your FDs. Returns from FDs are also taxable and clubbed into your income. Even at 7% interest you are effectively getting lower returns (under 5%) post tax. You will be in the highest tax bracket based on income. So the car loan should be immediately closed with amounts from the FDs.
Home Loan:
You must be claiming some tax benefits for the home loan in your taxes. You can similarly decide if the benefits are better than the FD returns. Without EMI details, I can only assume and in a lot of cases they are better and hence claiming tax benefits continues. Also with your financial standing you can continue and build wealth now as the returns from mutual fund investments will outweigh the pre-payment on the loan.
In numbers, let's consider you pay off the home loan amount of 29 lakhs in 5 years, your monthly contribution will be 57K and you would have paid approx. 34.25 lakhs to the bank. If you invest the same 57k monthly in mutual funds, you would accumulate 47 lakhs in 5 years at 12% returns.
So yes continue with your SIPs and top them up with additional amounts you can and build a good corpus for the future.
Also the remaining FDs amount of 14 lakhs after paying the car loan can be better deployed. Keep about 3 months expenses in FDs and the rest can be moved to a Hybrid Mutual fund (e.g. HDFC balanced advantage fund) to earn better returns.
With 2 daughters, you will be looking to provide for their education and better life until they are independent, so every rupee towards that big corpus is going be beneficial in the long run.
Do ensure you have sufficient term life cover and health cover for the family.
You can consult a CFP or a fee based advisor to get a comprehensive financial plan personalized for yourself. It will be worth the effort and money for a secured and bright future for the family.
Anonymous: I am going to retire in about 6 months have 24 lakhs corpus through SIPs expecting 45 lakhs in PF and gratuity, income from rent 20,000 which is sufficient for our expenses how to invest further safely.
As your expenses are managed by the rent you are receiving, your total corpus of 69 lakhs can be invested to meet your retirement goals keeping safety and capital (value) protection in mind.
Retirement will mean that some benefits you may have got during your working status, mainly the health cover from employer will not be available. So I hope you have already got a health cover for self and spouse; if not, then do consider it asap.
The corpus you have accumulated needs protection and also a bit of growth to meet inflation at least.
The rent typically may not increase each year to cover inflation, and then you will feel the need to reach into the corpus you have.
Considering the post-retirement life expectancy of 20 years, it's a long enough period to invest the corpus wisely to ensure you are well supported by it.
I recommend the three-bucket strategy:
1st bucket: Funds to meet expenses for the next 2-3 years, this can also be your emergency fund if required. Amount of 5-7.5 lakhs to be kept in a nationalised bank as FD (make multiple 1 lakhs FDs). FDs can earn close to inflation returns.
2nd bucket: Funds to earn a little above inflation and still be relatively safe, so expect to earn 1-2% above inflation. There are multiple options for this in conservative hybrid mutual funds / equity savings mutual fund. Consider 20~25 lakhs in this.
3rd bucket: Funds to provide growth to your corpus. You can consider to take some extra risk with long term view (7+ years) and invest the remaining amount in balanced advantage mutual funds. Here you may be able to get double digit returns and over long term, the compounding can potentially grow this amount to meet and support your needs.
If you are not very comfortable with any type of risk then stick to the first 2 buckets, to at least counter the inflation.
Invest in the products you understand and with access to your money anytime.
Remember whatever option you select, keep your risk capacity in mind and invest. Do not invest where you money is locked/blocked for a long period as that will not serve any purpose for you (I have come across retirees investing/purchasing products from agents, they do not understand them and then getting their money blocked for 5-8 years with promise of regular income later, but this generates below inflation returns, beware of such agents/products).
The above mentioned options will provide access to your money whenever you require without blocking it. Mutual funds have emerged as one of the most regulated and transparent industry.
You can also consult an advisor to understand the products before proceeding with your investments.
Stay healthy and invest wisely.
Anonymous: Hi I am 32 years old working in IT. I want to retire from IT. I have monthly expenses of 50k, 10L in bank and 12L in stocks. My question is: 1) what is the corpus amount to meet my monthly expenses? (Generate a revenue to cover my monthly expenses while corpus being invested in FD. considering inflation, and with the life expectancy 70 years) 2) at what age I can safely retire?
Your current savings/investment of 22L will support your expenses for only a few years at this time.
Today if you wish to retire, you will need over 2 crores in FD earning 7% returns to last for your life expectancy of 70 years.
I recommend you focus on saving and investing across different asset classes to maximise your corpus over time. Different asset classes like equity, debt, gold, etc., can provide you well diversified option to generate wealth and provide stability and liquidity.
FDs are a safe option but its safety net if not going to cover your whole corpus if the bank fails.
Understand the potential, risk and returns of different asset classes and considering the long time period you have, you can save over the next 10-15 years and then plan retirement once your retirement corpus is accumulated.
Mutual funds are a good option to consider as they cover few asset classes and are easy to manage and track.
The retirement corpus depends on the time period post retirement and the expense you plan to cover from it. Accumulating that corpus also needs a plan and commitment to save/invest on a regular basis.
- You can ask rediffGURU Janak Patel your questions HERE.
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