Fund Talk

I am 38 and work in a state enterprise covered by EPF scheme. My net salary is around Rs 24,000 a month, which is likely to increase 6 per cent every year. My household expense is around Rs 20,000 (including housing loan repayment).

I wish to create a retirement corpus through mutual fund SIP over the next 20 years to earn Rs 10,000 a month at present value in addition to the EPF I will get. Is this possible?  If so, kindly suggest two or three suitable funds. Presently I hold only three ELSS funds worth Rs 60,000, which would be redeemed after their lock-in period.

Pradeep K.C., Thrissur It should be possible to generate the retirement income that you are asking for. But let us get a few things in place before building a portfolio.

First, Rs 10,000 a month now will be Rs 38,700 after 20 years if inflation rises by 7 per cent every year. While inflation can be less, we assume this rate, going by the average price rise prevalent in recent years. If you build a corpus of Rs 58 lakh, 20 years from now, it can generate Rs 38,700 every month, if it earns 8 per cent interest rate per annum. A Post Office Monthly Income Plan currently generates this return. You will have to find a safe and suitable option, yielding similar returns, 20 years hence, if this scheme ceases then.

Second, if your salary grows at 6 per cent per annum, it may or may not meet your increasing expenditure, as a result of inflation. But being a state government employee, you are likely to have a dearness allowance component (besides your annual increment) that increases based on the consumer price index (inflation).

Nevertheless, we assume that you cannot increase your SIPs every year. We hope you will have more surpluses in hand once your home loan is repaid.

We, therefore, assume that you can invest your current surplus of Rs 4,000 every month and hope you can increase it by another Rs 3,000 five years from now. Without this additional Rs 3,000, your portfolio will only grow to Rs 4 lakh.

Third, we are hoping you will be able to build on this surplus in 18 years and not 20 years. Exit equities at the end of the 18{+t}{+h} year and invest them in safe debt instruments in banks or short-term debt funds. It may be risky to hold on to equities till the last year, lest there is any market turbulence.

Portfolio

Invest Rs 2,000 a month in Quantum Long Term Equity and another Rs 2,000 in HDFC Mid-Cap Opportunities. The Rs 3,000 to be invested five years from now can go into: Rs 1,500 in Quantum Long Term Equity and another Rs 1,500 in UTI Opportunities. Please review the performance of these funds five years later before investing further. You can also write to us for any performance review.

Beyond this, if you have surplus, you can up your provident fund contribution through the voluntary provident fund scheme that your employer will have. Use the proceeds from the ELSS funds to invest in public provident fund.

*** I am a salaried employee. Every month I set aside a certain portion of my salary towards investments. But due to lack of suitable opportunities this amount doesn't get utilised immediately and lies in my savings account, thus fetching a nominal return.

I am looking at other avenues such as mutual funds where I can park my money for a short duration with returns superior to my saving account. Also, please let me know if exit load is applicable if a SIP for 12 months is redeemed fully in the 13th month.

Krishnachandran S V You can consider investing in liquid funds. These are the best avenues for parking short-term money. There is no exit load on these funds and you can withdraw them frequently. Liquid funds can earn anywhere in the 4-9 per cent range. The returns were high in the last one year as interest rates were nearing their peak. This may not be a regular feature, especially if interest rates fall in the next quarter or two. You can look at funds such as IDFC Cash Plan C and HDFC Cash Management Savings Plan.

This said, as a general rule, ensure that your unallocated surplus does not exceed 5 per cent of your total investments. If you frequently find yourself in a situation of not finding suitable investment avenues, you can simply consider allocating some portion through SIPs in good equity or balanced funds depending on your risk appetite.

If you are risk averse, you can also ask opt for the voluntary provident fund (VPF) scheme, if your office has one (read the article on our MoneyWise page for more information). This will allow you to directly route a portion of your salary to your Employees' Provident fund account, over and above the mandated 12 per cent. This is an efficient way and the interest accruing will also be tax-free. Check with your employer for more details.

Moving to your query on SIPs, every instalment will need to be held for 12 months to avoid an exit load. That means if you try to withdraw the entire units after say a 12-month SIP, the remaining 11 months' instalment will suffer an exit load.

So what strategy should you use in SIPs? The best is to invest in them for a period of at least three years (or much more depending on your goals) and then stop the SIPs and leave the investment untouched for at least one year (ideally another two years) before you decide to withdraw. This way you will also not have any short-term capital gains tax, in case of an equity fund.

Remember, SIP is a long-term tool. A one-year SIP hardly gives time for rupee-cost averaging to work.

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