Your fund portfolio

I am 70 and have retired from service. I have a balance of ₹30 lakh in PPF, ₹15 lakh in bank deposits and ₹8 lakh in Post Office MIS (monthly income scheme).

A financial advisor suggested that I invest in mutual fund MIP (monthly income plan) to reduce income tax (as I am in the 30 per cent bracket). Accordingly, I have started withdrawing money from my bank deposits and putting it into mutual fund MIPs and have already invested ₹5 lakh. I would like to continue to do so till I entirely shift from deposits to MIPs. Am I making the right move?

Bijaya Kumar

After retirement, safety of the corpus you have built over the years is the most important aspect of financial planning that you need to take note of.

For this reason, it may not be a great idea to shift from deposits to MIPs offered by mutual funds simply on the basis of assuming there would be great tax benefits. Please note that the dividends declared by MIPs are taxed at a rate of over 28 per cent. The capital gains on monthly income plans are taxed too.

Of course, if you retain units for more than three years, you would have the benefit of indexation.

After three years, capital gains are taxed at 20 per cent, with indexation benefits.

MIPs do invest in a combination of (mostly) debt and a small portion in equity and may deliver inflation-beating returns over the long term. But you must invest only a small portion in MIPs and certainly not move your entire bank deposits to MIPs.

Only equity-linked savings schemes from mutual funds offer tax deduction and also tax-free capital gains after a holding period of three years.

So, do not invest any more than what you already have in MIPs.

You can consider investing in bank deposits that offer monthly or quarterly interest payouts. This interest component can be invested in MIPs.

Reliance MIP and Canara Robeco MIP are quality names that you can consider.

I am 28 and have been investing ₹1,000 in each of the following funds, for my retirement, through SIP (systematic investment plan) route: UTI Opportunities, Birla Sun Life Frontline Equity, ICICI Pru Value Discovery and Reliance Equity Opportunities. Is my choice of schemes appropriate?

Raj Kumar

For the sum that you are currently investing, two schemes would suffice and would provide you with adequate diversification without spreading yourself too thin.

You could split ₹4,000 as follows: continue investments in UTI Opportunities, a large-cap scheme, and park ₹2,000 in it. Invest ₹2,000 in ICICI Pru Value Discovery, a mid-cap scheme that has delivered extremely well over the past 10 years.

Although Birla Sun Life Frontline Equity and Reliance Equity Opportunities are quality names, you can stop further investments in these as the other two schemes would give you adequate diversification and avoid overlap of holdings.

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