Providing for your parents

Equity arbitrage funds and a mix of large and mid cap-oriented schemes can help

Parents strive hard to secure their child’s life both financially and emotionally. Likewise, when parents grow old and are unable to help themselves, children often want to provide them with financial and emotional support. For 21-year old Chennai-based Shreya Murty, who joined an IT product company after graduating from one of the country’s premier technological institute, taking care of her aged parents’ financial needs is as important as her career. “My parents are in their sixties and have retired from their respective jobs”, says Shreya, who has been the only earning member in her family for the last 10 months.

Her father was employed in a private limited company and retired from service about four years back. Her mother, who was a teacher in a private school, also retired two years back. The family currently resides in a home owned by Shreya’s father. Shreya has a term policy cover provided by her employer, with a sum insured of ₹1 crore. Her employer’s health insurance also covers her parents; however, the coverage is low at ₹2 lakh for the family.

“Given that my parents are aged, it will be difficult to buy a new policy now. Hence, I want to save a corpus of ₹15 lakh over the next three years to meet any unforeseen medical/family expenses post my marriage”, she explains.

Her parents have some money saved for her marriage, which they anticipate will happen three years from now. Besides, they have a small corpus to meet their monthly expenses. “While I will continue to support them even post marriage, I want to set aside some corpus to meet any financial/medical emergency”, elaborates Shreya.

Investments at a glance

Her current take home salary is ₹60,000 and she spends ₹20,000 every month towards family maintenance. She has been investing ₹10,000 in a recurring deposit (RD) scheme that fetches 6.85 per cent interest and has a total RD investment corpus of ₹80,000. She currently has a surplus of ₹30,000 every month and ₹2 lakh in her savings bank account.

Besides the ₹10,000 she is investing in RD, she can park an additional ₹5,000 every month in the same scheme. This should help her save ₹6 lakh by end of the third year.

Options available

She can consider investing ₹15,000 every month in equity arbitrage funds. These funds try to capitalise on the arbitrage in stock prices between the cash and derivative segment and, hence, the risk is lower than pure equity funds. Given that the time horizon of three years is short for equity markets, arbitrage funds maybe a better option.

Schemes such as Edelweiss Arbitrage Fund and Aditya Birla Sun Life Enhanced Arbitrage Fund have delivered in excess of 7 per cent over the last three years. Arbitrage funds are treated as equity funds for tax purposes and have a tax advantage compared to fixed interest-bearing instruments such as FDs and RD.

The long-term capital gains tax is 10 per cent, while interest on FDs and RDs is taxed at the individual’s income tax slab rate. Assuming an average return of 7 per cent and a 10 per cent increase in investible surplus, Shreya should be able to mop up ₹6.6 lakh over the next three years.

Of the ₹2 lakh that is currently in her savings bank account, she can invest ₹1.2 lakh in equity arbitrage schemes. This should grow to about ₹1.5 lakh by the end of the third year.

Likewise, assuming that her current RD corpus of ₹80,000 grows at 6.85 per cent, she should have about ₹0.98 lakh. With this, she will have ₹15 lakh by 2021.

The surplus of ₹10,000 available after investing in RDs and equity arbitrage funds can be parked in diversified equity schemes, since the money will not be needed in 2021. Given that she is young and has the appetite for risk, she can consider investing in a combination of large and mid cap-oriented schemes.

Large-cap schemes with a good track record such as Invesco India Growth, Mirae India Opportunities and Aditya Birla Sun Life Frontline Equity can be considered. In the mid-cap space, she can consider schemes that have demonstrated strong performance such as Mirae Emerging Bluechip, HDFC Midcap and Principal Emerging Bluechip.

The author is co-founder of Rana Investment Advisors

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