Investors withdraw Rs 773 cr from gold ETFs in FY18 so far
My monthly Income is around ₹33,000 and my wife’s is about ₹25,000 a month. As I stay with my parents, I don’t pay rent. I have a four-year old child. I have a term plan with a ₹1 crore cover with Tata AIA and LIC Samridhi Plus in my name and wife’s name. I am paying a premium of ₹4,000 every month for the policies.
I have invested ₹2 lakh in ICICI Pru Balanced Fund in my name and ₹2 lakh in HDFC Balanced Fund’s Monthly Dividend option. I use the dividend to pay premiums on my term plan.
I want to invest ₹15,000 every month for the purpose of purchasing a plot of land after five years. After 14 years, I need money for my child’s education. Please suggest a few mutual funds.
Shashank Nayak
In our view, it would be best if you re-assess your financial goals. If your statement that your insurance cover at ₹1 crore is correct, you seem a little over-invested in life insurance for your current income levels.
However, do check if the life insurance policy you own with Tata AIA is a pure term plan. LIC Samridhi Plus is not a pure term plan but a 10-year Unit Linked Insurance Plan (ULIP) in which only a small part of the premium you pay goes towards paying for a term insurance cover. This is a highest-NAV-guaranteed plan, which will pay you either the highest NAV in the first 100 months or the final fund value at the time of maturity, 10 years from your investment date.
In terms of returns, it has managed about a 10.6 per cent annualised return on its NAV (investor returns may be different from fund returns) in the last five years. The fund has slightly underperformed other ULIPs in the aggressive equity category. Given that you are paying quite a hefty insurance premium of ₹48,000 a year already and are locked into your plans for at least the next ten years (going by the Samridhi Plus plan), it would be best not to add to your insurance cover any further. From here on, look to save and invest to fulfil your other financial goals.
It is unclear why you would like to allocate such a high proportion (25 per cent) of your total monthly income towards buying a plot of land. While land can deliver good capital appreciation over the long term, sinking a large sum into a single parcel of land exposes you to many risks – it generates no rent, it concentrates your portfolio in one location, it is subject to encroachment and it lacks liquidity as well. Plots can be quite difficult to sell and encash if you need money quickly. You can either plan for a smaller investment in a plot or, better still, consider investing that ₹15,000 per month in equity mutual funds for wealth creation.
Coming to your child’s education goal, balanced funds which you already own are good options to build a child’s education fund. The two funds you have chosen also have a good track record. But investing lumpsum amounts in any equity-oriented fund is not a good idea as that exposes your returns to the risks of market timing.
In future, you could take the Systematic Investment Plan route to invest in balanced or equity funds. But assuming that the current value of your investments in ICICI Pru and HDFC Balanced Fund is ₹4 lakh, at a 10 per cent assumed annual return, this can grow to ₹15 lakh at the end of 14 years. To supplement this, consider SIPs in multi-cap funds such as Franklin India High Growth Fund and Quantum Long Term Equity fund, in addition to your current investments to meet your child’s education needs. You can start with ₹10,000 a month and step up the SIP as your family income rises.
In addition to the above, you should immediately switch from your monthly dividend option in HDFC Balanced Fund to the Growth option of the same fund. Taking out monthly dividends from any equity fund prevents its returns from compounding and defeats the very purpose of long-term wealth creation. It is best that you pay the insurance premium out of the ₹15,000 a month that you had planned to put aside for the plot of land.
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