Financial Planning

I am 44 years old and my family consists of my wife, 8-year-old son and my parents. We are NRIs and are planning to return to India.

On my return, I don’t plan to take up employment, but may do some consulting work. However, I don’t intend to depend on this option as a source of income.

Hence, I need to ensure that I have a corpus that will support all our future needs such as our living expenses, son's education and medical expenses of the family.

I have bought two apartments and intend to let them out on rent since I feel it’s a hedge against inflation. Hence, I have very limited exposure to equity. Am I right in having done so?

— P. Rao

It is always difficult to compare one asset class with another. Equity has delivered double digit returns over the past 10 -20 years. In the past 15 years, equity has delivered less than eight per cent annually nearly half of the time. Volatility in equity was higher than that in real estate. But over the past 10-15 years real estate too has delivered returns similar to equity, but with lower volatility. It is mainly because of its illiquid character.

Since you are looking for regular income, real estate is one of the sources. Although the yield in the initial years will be around 3.3 per cent, over the years as the property prices appreciate, the yield will turn attractive.

Systematic plan

You will encounter a shortfall in income after 20 years, if inflation is around 7 per cent and if the inflation rate continues to be higher than the growth in rental income. Since you will continue to be in the highest tax slab, your FD returns will also be lower than inflation rate. You will also have reinvestment risk once your fixed deposit matures. To lead a worry free life you need to increase exposure to equity.

It may be prudent to invest the surpluses in the earlier years in equity through SIPs to build a tax-free corpus to meet the shortfall. Since most of the mutual fund schemes in your portfolio are large-cap in nature, diversify with SIPs in mid- and small-cap funds.

Since you have already made provision for your son’s education, once your shortfalls are met with equity, you can leave all your assets including mutual funds and gold as estate to your son.

Liquidity

Since your incomes are coming from the rentals, you need to have some liquid funds. Since you have not disclosed your pattern of fixed deposits we suggest you that to break it into deposits of Rs 10 lakh each and construct a portfolio. Each of these deposits must mature in successive years. You can beat reinvestment risks and for any emergency you will not need to break the entire deposit. Since you have aged parents it will be useful in meeting any emergency medical needs.

(The writer is CEO, myassetsconsolidation.com)

(Mail your queries to fp@thehindu.co.in)

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