This would mean a longer wait to recoup capital losses before making a return.
Q. I am a 30-year-old government employee. My net monthly savings is ₹30,000 and I have just started investing ₹7,000 a month in two ELSS SIPs with a return of about 7%. I want to invest my remaining savings of ₹23,000 to help me achieve my target of a ₹15 lakh corpus in 3-4 years. I can bear moderate-to-high risks and my taxable income for FY21 is nil. Please advise.
A. If you have a goal within 3-4 years, it is not a good idea to invest in equity funds in order to achieve it. Therefore, ELSS funds are not a good vehicle for this goal. Though you’ve set your return expectations modest at 7%, we’ve been in a bull market in stocks for the last six years, as a result of which most stocks have turned quite expensive, if not overvalued. The markets can correct significantly from here.
Should a deep correction materialise, even a bounce-back to current levels can take more than the 3-to-4-year time frame you have in mind. This would mean a longer wait to recoup capital losses before making a return. Yes, SIPs can help by averaging your costs lower but they can begin to deliver returns only if the markets bounce back.
The other problem with ELSS SIPs is that each instalment you pay is locked in for 3 years. You will be able to withdraw your entire money only after 6 years when every SIP completes the 3-year lock-in period. Yes, ELSS SIPs are a good instrument for tax savings and goals beyond 6-7 years. But, you should consider stopping your SIPs if you were not aware of these factors before commencing them. In future, if you don’t need tax benefits, avoid ELSS and invest in plain index funds.
If you are able to free up ₹30,000 to invest every month for the next 4 years, you can easily get to ₹15 lakh as the value of your capital alone over these 4 years will be ₹14.4 lakh.
You can stick to safe instruments that offer capital preservation. A simple recurring deposit with HDFC Bank (5.3%) or Axis Bank (5.4%) can get you to over ₹16 lakh with minimal risk to your capital.
You can also consider SIPs in very conservatively-managed ultra-short term debt and liquid funds. If you go for the growth option, it is more tax efficient than the dividend option and also recurring deposits. Your gains after 3 years will be taxed as capital gains after considering inflation indexation.
Q. I am 30-year-old government servant. I invest the maximum limit of ₹1.5 lakh every year in PPF. I want to invest via SIPs beginning with ₹5,000 a month. Could you please recommend the best fund manager to invest with? My risk appetite is moderate.
A. The Public Provident Fund is a good choice for any new investor with its high tax-free return and you should continue your savings with it. Before getting down to starting SIPs or choosing funds, it would be good to map out your financial goals with their timelines. It would also be good to put your investment basics in place by building an emergency fund, buying life and health insurance to protect your income in case of unfortunate circumstances.
First, save up to six months’ worth of living expenses in bank FDs to take care of any interruption to your income or sudden emergencies. If you have dependants, you should buy a pure term insurance policy so that your family isn’t left short of financial security in case something happens to you. To prevent health issues from putting a big dent in your finances, get a basic ₹5-lakh health insurance policy.
Once these building blocks are in place, list out your financial goals and those of your dependents that you plan to meet. Put timelines to each goal. Where you invest towards each goal will depend on both your return requirement and the time you have.
For 1-to-3-year goals, invest in safe instruments like post office time deposits, recurring deposits and FDs with leading banks. For 3-to-5-year goals, consider SIPs in short term debt mutual funds. For 5-to-7-year goals, hybrid funds may fit the bill or post office schemes like NSC can be explored.
For goals beyond 7 years, SIPs in carefully chosen multi-cap equity funds or broad market index funds would be ideal. A qualified financial adviser can help plan out all this. But if you want to choose funds on your own, it would be best to do SIPs in index funds like Nifty500 and Nifty100 rather than attempt to choose actively-managed equity funds on your own.
Q. I am 38 years old and am in the private sector. I save ₹5,000 a month, which I’ve been investing in MFs for the past six years. I would like to target
₹1 crore for retirement…
A. At an assumed return of 10% CAGR, you will need to invest a total of about ₹13,100 a month in equity funds or other avenues over the next 20 years to get to a ₹1-crore corpus. However, you are wrong to assume that a ₹1- crore corpus would be adequate for your retirement. Remember, even at 5% inflation rate, monthly expenses of ₹50,000 today would have bloated to ₹1.32 lakh in 20 years. As a thumb rule, you should strive to have at least 25 years’ worth of living expenses by the time you retire (you can use online retirement calculators for more precise calculations).
So, your retirement corpus should be roughly ₹3.9 crore in 20 years’ time (1.32*12*25).
Retirement planning would require you to also step up those SIPs over the years, adjust your retirement targets based on your lifestyle and liabilities and constantly monitor and rebuild your portfolio to ensure its on track. Do use the services of a qualified financial planner to do a really systematic job of this if you won’t have the time or the skills.
Q. Is there a government licensing agency website that can provide a list of licensed financial planners? If not, what is the best way to find a genuine and reliable financial planner? Could you give an idea of a financial planner’s indicative fee for consultations?
A. It is very wise of you, indeed, to seek professional help to construct a financial plan and to help you with your investment journey. Most folks who consult doctors, lawyers, accountants and a variety of other professionals for their other requirements, like to think that they can manage their financial journey by themselves.
Financial planning requires considerable expertise as it requires gauging your goals and risk profile, prioritising your goals and setting timelines, putting portfolio basics like insurance in place and making an asset allocation plan, before getting on to product choices. Your financial plan is also not a one-shot exercise and will need constant attention throughout your life. As most folks do not have requisite expertise and cannot devote sufficient time to this, it is best to engage a fee-based Registered Investment Advisor (RIA) or Certified Financial Planner.
This listing on SEBI’s website will allow you to look for an RIA in your city: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognised
Fpi=yes&intmId=13. This link from the Financial Planning Standards Board will allow you to find a financial planner in your city: https://india.fpsb.org/cfp-certificants-directory/.
Unfortunately, there’s no publicly-available rating or feedback process which will allow you to assess financial planners before selecting one.
A test of a good RIA is how much time he or she spends understanding your financial situation, goals and risk profile before getting down to your financial plan. An adviser who starts pushing products from the word go is best avoided.
Look for a systematic process and a fairly large roster of existing clients before you sign up. Ask for client testimonies. If you can get friends or acquaintances to recommend good financial advisers they’ve been using, that would be a good start. Fee structures range from flat to ones based on a percentage of assets managed. SEBI’s guidelines cap the maximum fee at ₹1.25 lakh per annum per client or 2.5% of assets under advice for registered investment advisers. However, actual fees can be much lower. Professional planners will ask you to sign a written agreement of what they will offer before proceeding.