Mutual Funds

Fund Query: Which schemes are ideal for monthly SIP of ₹25,000 over next two years

Aarati Krishnan | Updated on May 31, 2021

I am 70 years old and have sufficient investments so that I receive ₹60,000 per month by way of rent and interest on my SCSS and fixed deposits. Our monthly expenses of ₹45,000 leave a balance of ₹15,000. We have a bank balance of ₹3 lakh to meet any emergency expenses. Given this surplus, I am investing ₹15,000 in monthly SIPs — ₹10,000 in HDFC Hybrid Equity and ₹5,000 in HDFC Midcap Opportunities. We have medical insurance cover of ₹5 lakh. I also hold mutual fund investments worth ₹33 lakh in the following schemes: ABSL Frontline Equity, ICICI Pru Value Discovery, ABSL Tax Relief, Quantum Long Term Equity, HDFC Hybrid Equity, HDFC Midcap Opportunities and Mirae Asset Emerging Bluechip. I plan to continue holding these to manage my future requirements of cash to meet living expenses with inflation. Please suggest a suitable Systematic Withdrawal Plan (SWP) out of these funds for the next 10 years. I also have proceeds of ₹20 lakh from redeeming Franklin India Flexicap and a matured bank FD. I propose to invest this sum in the following mutual funds by way of SIPs of ₹25,000 per month over the next 20 months for a period of ten years for supporting my grandson’s higher education: Axis Midcap, Mirae Asset Largecap, Parag Parikh Flexicap and Canara Robeco Bluechip. Please let me know if this plan is good.

Raju, Coimbatore

Your fundamental idea of investing your excess corpus post-retirement in equities for the long run, after meeting your regular income and emergency needs, is a sound one. But before deciding on your equity allocation, you may need to build in much higher buffers towards your future living expenses and emergency requirements.

Ideally, you should allocate surpluses to equity after ensuring that your debt corpus is sufficient to meet your expenses for the next 12-13 years. While your current income from deposits and rent appears to be surplus to your need of ₹45,000, this happy state of affairs may not be permanent. At an inflation rate of 6 per cent, your annual expenses of ₹5.4 lakh would shoot up to ₹9.1 lakh in ten years’ time. Additionally, at this life stage, it may be necessary to budget for medical or caregiving needs that are not covered by insurance plans — the need to have an attendant or a nurse to assist you or your spouse at a later stage, for instance. Such services can add quite a bit to your monthly living expenses. The emergency corpus of ₹3 lakh may not be sufficient to meet this or any real health emergency and we suggest bolstering it to ₹10-12 lakh. The emergency fund allocation ought to be parked in readily breakable deposits in a systemically important bank, so that you can draw on it any time. Don’t shoot for high interest rates on this portion of your money.

Your allocation to equity should be decided after setting aside this emergency fund of ₹10-12 lakh. To arrive at an equity allocation, it would have been useful to know the current size of your income-earning portfolio and its allocation pattern. If much of your current monthly income of ₹60,000 comes from your SCSS/fixed deposit interest, that would place you in a reasonable position. However, if a big portion comes from rent and a lot of your ‘safe’ allocation is in property, then rental income can dip over the years as the property gets older. Given that property in India also offers very low rental yield (2-3 per cent if you’re lucky) you may need to consider liquidating the property to park the proceeds in more easily accessible avenues like bank FDs and SCSS.

Based on ballpark estimates of your income needs, we would roughly estimate that you should have about ₹75 lakh as your safe debt allocation — parked in bank FDs, SCSS and options like PM Vaya Vandana Yojana at this juncture. If you do not have this kind of corpus in debt instruments currently, you can liquidate your investments of ₹33 lakh in equity funds and move it into these avenues. In our estimation, a sum of ₹75 lakh should help meet your living expenses for the next 13 years, after budgeting for 6 per cent inflation and a matching return on your debt investments.

Any surpluses you have today, over and above this ₹75 lakh can be allocated to equity funds. You can take the SIP route over 24 months to make this investment, given high market levels. On the choice of equity funds, there is no need to have so many as then your portfolio would be difficult to monitor. We would suggest combining index funds such as UTI Nifty Index fund and Nifty Next50 fund, with more specialised ones such as ICICI Pru Low Vol Fund of Funds for one portion of your equity allocation. Among active funds, Mirae Emerging Bluechip, HDFC Midcap Opp. and Parag Parikh Flexicap are good choices.

You can think of moving your equity money into debt funds after ten years. Setting up SWPs can wait until then. Surpluses at the time of your passing can be left to your children or grandchildren as your legacy.

Published on May 16, 2021

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