Readers' Corner: Financial planning

My cousin passed away and his wife received Rs 50 lakh as insurance payout. She has a son, aged 10, and a daughter, aged 7. We wish to invest this money. There are three goals: Supplementary income of Rs 20,000 a month that should increase with time, children’s education when they go to college in 8-10 years, children’s marriage. Where and how should we invest this money?

Let’s plan this in three parts – education for the son and daughter and supplementary income for self. Let’s first invest amounts of Rs 6 lakh and Rs 4 lakh for the son and daughter respectively so that each of them has approximately Rs 25 lakh when they become 20 years old. Their portfolio will have to comprise of large cap and mid-cap equity mutual funds in equal proportions. For supplementary income, we will need to deploy Rs 40 lakh into balanced funds and use the systematic withdrawal plan mechanism to generate the Rs 20,000 a month. Thereafter you may increase this amount by about 5-7 per cent a year to accommodate for inflation.

I am planning to migrate abroad. I would need Rs 7-10 lakh in different stages over the next one-one and a half year. I have these investments in equity mutual funds. Should I shift them to sweep in, sweep out fixed deposits or is there a better alternative investment option available?

I would recommend that you move the money out of equities and switch this money into short-term bond funds. By doing this, you will be able to earn a little better than the savings bank rate and the fixed deposit rate. You will also be able to withdraw this fund at a moment’s notice and once the money is available in the bank, you can use it the way you decide. Meanwhile, enjoy the higher interest. The interest from bond funds is taxable but given that you are migrating abroad and assuming you may not have any other income in India you might actually be below the tax bracket and therefore you may not worry about taxation. If there is a tax deducted at source, then you can file a return to claim that refund.

Kartik Jhaveri

My stock broker offers systematic investment plan (SIP) in stocks. It has select large-cap Sensex companies on offer. I already make investments through mutual fund and wish to allocate small amount directly to stocks to understand how it works. Is SIP in stock a good idea?

SIP as a concept is a brilliant idea. SIP in equities is not quite the same as doing SIP in a mutual fund. The fundamental difference to understand is that in an equity portfolio you are responsible for all decisions. The broker is not going to tell you what to sell and when. So you can consider SIP into equities under the circumstances where you are planning to buy a stock or a basket of stocks and want to hold it forever. Also, you will have to keep monitoring the financial health of the companies that you’re going to buy through SIP. The third thing to understand is the principle of portfolio diversification you will need to do these SIP is in different baskets of stocks. The fourth thing to understand is administratively when you calculate your capital gains it and be quite a headache. Against this, by doing an SIP in a mutual fund, all your worries are taken away and a professional team is taking care of your portfolio.

The writer is director, Transcend Consulting. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in