Friday, 26 March 2010

Allocate funds wisely, enjoy your golden years

26 Mar 2010, 0427 hrs IST, Lovaii Navlakhi,

Let us take the case study of a 65-year old and analyse the same. Mrs X has Rs 50 lakh and has invested the same in different products. Each of these has different time horizons and varying rates of return; some are taxable and some are tax-free. Mrs X requires Rs 25,000 pm to manage her lifestyle. 

Regular Cash Flow 

At this moment, she may be quite relaxed as her investments are earning more than her required earnings of Rs 25,000 per month. There could be some issues in terms of regularity of the income, as some of the interest payouts are not monthly. Returns from mutual funds may not be regular too, but in this case is a buffer.

Asset Allocation 

The portfolio of Rs 50 lakh has just 12% of the assets in equity, and hence, is a conservative portfolio considering Mrs X’s age. Since this seems sufficient to meet her goals, we are fine with her investment in fixed income instruments to the extent of 88%. There is, of course, a possibility that Mrs X has a running PPF account in which she can deposit the returns from her equity MFs and continue to earn 8% tax-free returns. As one is aware, the maximum that one can add in a PPF account in a financial year is Rs 70,000.

Taxable Income 

The returns from equity MFs by way of dividends are tax free. The income subject to tax amounts to Rs 3,42,500 for the year. However, Mrs X can take benefit of the Rs 1 lakh invested in ELSS under Section 80C (even investment in PPF can get the same benefit, subject to a maximum of Rs 1 lakh at present), and thus have a taxable income of Rs 2,42,500. Since Rs 2,40,000 of income is exempt for senior citizens, Mrs X will pay a tax on only Rs 2,500 @ 10%. Thus, her returns of 8.3% on her portfolio are virtually tax-free.

Liquidity Analysis 

We assume that Mrs X will live to the age of 90 years, and hence she needs this money to last her for the next 25 years. Prima facie, earning a return of Rs 3 lakh per annum does not seem difficult. However, we have not considered the rate of inflation — if it is 6.5% p.a, the funds will last her 20 years. Further, in case she needs Rs 5 lakh as medical emergency, the money will run out in 18 years. An alternative suggestion to Mrs X will be to increase her equity allocation to 25%, and push her portfolio returns to 9% p.a. That way, her funds last her for 25 years, if inflation remains at 5% p.a.

A financial planner will evaluate the portfolio from multiple perspectives such as returns, risks, liquidity, taxability and even longevity; and approaching one could give you peace of mind, and a greater piece of the action on earth. Get one today!

The author is the MD & Chief Financial Planner of International Money Matters Pvt Ltd.

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