The Hindu Business Line : Fund Talk

By reverse mortgaging my residence, valued at Rs 2 crore, I want to get Rs 20,000 per month for ten years from now, of which I will invest Rs15,000 or Rs 16,000 a month in funds (SIP route) such as HDFC TaxSaver, SBI Magnum Taxgain, Sundaram Select Midcap and Magnum Contra for the same ten years. Will it not give me money for repayment of the loan in ten years time? Is this a good plan that will improve my cash flow by Rs 4,000-5000 per month? What plans do I choose, what are the pitfalls to overcome and periods for review? I am almost 70 years old, and want the house to go to my children and not put it up for sale.

A. R. Subramanian

Chennai

Reverse mortgages are suitable only for those who want to supplement their retirement income. It is not a good idea to use money from reverse mortgages to invest in riskier assets, such as equity, with the goal of building wealth. A sharp swing in the value of your investments in the years of repayment could affect your ability to service the loan. This is something you cannot afford, as you have every intention of retaining your house.

Dewan Housing's Saksham, the first reverse mortgage offering in India, charges an interest rate of 12 per cent on the loan. This means that even if you choose to invest a significant portion of the cash flows received into equity, your investments will have to grow at a rate much higher than 15 per cent just to repay your loan, let alone leave a surplus. Over a ten-year period, an annual return rate of about 15 per cent is just about achievable from equities. Within this period, the bulk of the returns could be earned in a brief period and failure to book profits in a timely fashion could result in much of those gains evaporating.

If you opt for a reverse mortgage, you do not get to choose the loan amount. The loan value is typically 40-60 per cent of your property value. If the tenure of the loan is only ten years, then you will be left with a significant surplus, possibly much higher than the Rs 20,000 that you have estimated. The additional monthly income requirements of Rs 4,000-5,000 that you seek, however, could be earned by say, renting out a portion of your house or simply by re-jigging some of your existing investments, instead of taking on fresh debt.

Aside from five-year bank deposits that offer better yields now and also provide monthly and quarterly interest payment options, you could park money in liquid or money market funds that offer slightly better returns and a monthly dividend option. You can also opt for short-term, pure- debt, fixed maturity plans that are now being launched by most fund-houses.

For your risk profile, we would recommend not more than 15 per cent of your investments be made in equity. The funds you have mentioned have a good track record but Sundaram Midcap and Magnum Taxgain may be suitable for a more aggressive investor. HDFC Top 200 and Franklin Bluechip are good options. HDFC TaxSaver is suitable if you do not mind a three-year lock-in period. FT India Life Stage Fund of Funds — 50's plus plan or 50s plus floating rate plan may be another option you could consider.

Opt for the dividend option in all funds. Neither the declaration of a dividend, nor the quantum is guaranteed by mutual funds. However, choosing the dividend option allows you to cash in on a rising market and sweep your returns into safer investments.

Invest through 6-month or one-year SIPs and monitor your portfolio, say, once in six months or a year. Do not let brief periods of underperformance perturb you. Avoid new fund offers and funds that do not have at least a good five-year track record.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Shanthi Venkataraman

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