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Sunday, Nov 14, 2004

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Fund Talk

My family earns Rs 1,80,000 annually. I have about Rs 60,000 in equity-oriented mutual funds and shares and Rs 1,40,000 in provident funds. I invest Rs 5,000 annually in LIC policies, about Rs 5,000 in recurring deposits and Rs 1,500 in UTI's ULIP. Please suggest a comprehensive retirement portfolio given that I have surplus of about Rs 20,000 annually.

S. Muthukumar

The information about your investment strategy and portfolio suggests that you may not be taking complete advantage of the tax saving schemes. For investors in the 20 per cent tax bracket, National Savings Certificate should be the primary means of tax saving.

The interest accrued on NSC would get deducted under section 80-L and is also eligible for tax rebate. This gets you a higher yield to maturity than PPF. Since the NSC rate of interest is almost always linked to that of PPF, there is no danger of interest rates on NSC going below that of PPF six years hence. NSC could earn higher returns than PPF for a long time to come.

Voluntary contributions to EPF are also better than PPF. EPF has been earning higher returns than PPF in the past four years. In addition, it would be earning tax-free returns till your retirement. If interest from NSC becomes taxable, then EPF is the best possible retirement vehicle in the non-equities space. Otherwise, NSC is better.

In addition, between a tax saving instrument and a non-tax saving instrument, opt for the former. For instance, you could opt for NSC rather than RBI Relief Bonds. That would fetch you similar returns apart from tax rebates. Your reliance on equity-oriented mutual funds, as early as in 2001, is probably the best financial decision you have made till now. Whatever be the risk profile of an investor, inclusion of equities is a must to beat inflation. The choice of schemes, however, could have been better.

Our preferred choice for investors with a conservative bent of mind is as follows:

Equity funds: HDFC Top 200, Templeton India Growth and Birla Dividend Yield

Balanced funds: HDFC Prudence

Tax saving plans: HDFC Taxsaver 2000, Birla Equity Plan and Templeton India Pension Plan

You could modify this list after talking to your financial advisor or after making your own investigations. You have insured yourself adequately for about Rs 1,75,000. In future, as your income increases, however, buy only term insurance. Money-back and endowment policies may not provide adequate returns.

Your preference for recurring deposits and UTI's ULIP is entirely out of place. You can do nothing about ULIP now. You can do something about recurring deposits if discontinuation does not prove costly for you. You should also check your preference for excessive diversification given the size of your portfolio. The costs (forgetting to renew or redeem) and time of managing a diversified portfolio could eat into your returns and family time.

In addition, given that your daughter's higher education and marriage is quite some time away, you need not maintain a separate portfolio. You run the risk of that portfolio earning returns that are lower than that of your overall portfolio. Hold a merged portfolio now and separate them 10-12 years from now.

Your plan to buy a flat in 2006 may also need to be revisited. Independent properties yield better returns than flats over a longer time horizon. This is because the proportion of investment in land is higher in independent properties. Maybe you should buy half a ground in your area of choice now, and consider building later. The overall cost may not be significantly higher than that of a flat.

In addition, do not withdraw from EPF for constructing your house. The pre-tax interest on EPF is 10.5-11 per cent for persons in the 20 per cent tax slab. For the down payment on your house, if you could borrow at a lower rate of interest or have your own surplus, use those options.

As regards your surplus, keeping in mind these factors, the following options could be appropriate: Rs 14,000 in National Savings Certificate and Rs 6,000 in tax saving plans. Buy medical insurance for you and your family immediately.

Queries may be e-mailed to, or sent by post to Business Line, 859/860, Anna Salai, Chennai 600 002.

Suresh Krishnamurthy

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