My aunt who is currently 62 years old is seeking advice regarding her investments in mutual funds. She plans to trim her portfolio to absolutely minimise her exposure to equities. She wants to redeem her unworthy funds and invest in instruments which will give her monthly returns. Kindly suggest some good monthly income plans (MIPs) and other investments where she can get monthly or quarterly returns.
She has an existing investment of Rs 9 lakh in Post Office MIS and Rs 5 lakh in bank fixed deposit.
- Dipankar Majumdar
Your aunt seems to have begun investing in mutual funds at a rather advanced age. Moreover, investing Rs 10.30 lakh in 21 different, largely equity, funds does not augur well for any portfolio.
You have not provided us with information that is important for conducting portfolio analysis. For instance, you have not told us what was desired from the portfolio at the time when the investments were made.
Further, in the absence of information in this regard, we are proceeding on the assumption that your aunt has no other investment, that she has no outstanding liabilities, such as servicing a loan or taking care of a financial dependant, and that what she primarily requires from her portfolio is a regular income, as you have stated.
Your aunt's portfolio shows a greater tilt towards fixed-income instruments: she has invested Rs 5 lakh in a fixed deposit and Rs 9 lakh in Post Office Monthly Income Scheme (POMIS), amounting to a total of Rs 14 lakh. The overall debt-equity ratio of her portfolio works out to 58:42.
In the debt component of the portfolio, your aunt has chosen the safest options where her capital is protected and the returns are assured. However, she has missed out on the advantage of investing in a completely secure scheme offering a higher guaranteed return - Senior Citizen Savings Scheme (SCSS).
SCSS is a fixed-income product that offers 9 per cent return per annum compounded quarterly. It matures after five years and can be extended by another three years. It, however, comes with a couple of riders: an individual cannot invest more than Rs 15 lakh in it and the investor needs to be at least 60 years old at the time of investment. Your aunt can look at the option of transferring her investments in POMIS or fixed deposit to SCSS when the former mature.
Consolidating your portfolio
Investing Rs 7.8 lakh across 21 fund schemes amounts to excessive diversification. If you invest in so many funds, you duplicate stock holdings and investment mandates and add to your holding cost. The time frame of investment also indicates that she did not invest in these funds using a systematic investment plan, which is the optimal way of investing in equity funds. Instead she invested lump sum amounts. It is for this reason that her investment of Rs 7.8 lakh has grown to just Rs 10.30 lakh over a five-year period.
It is imperative that she consolidates her fund holdings. Below we have suggested two portfolio options: either she should stay away from equity mutual funds completely or she should take only a few calculated risks (see table).
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If your aunt prefers the conservative portfolio, then she should invest all her fund holdings in four monthly income plans (MIPs) of mutual funds. These schemes invest just 20 per cent of their corpus in equities. Though they do not guarantee returns, they do make frequent payouts, which will help your aunt meet her regular income needs. The MIP category has delivered a five-year annualised return of 8.32 per cent (as on September 28, 2010), which scores over the returns offered by POMIS and FDs. Further, we checked what your aunt's status will be once direct tax code (DTC) is implemented from April 1, 2012. Post DTC, income from MIPs (dividend option) which earlier attracted dividend distribution tax (DDT) of 12.5 per cent, will be taxed according to the individual's income-tax slab. Her overall investments amount to Rs 24.30 lakh, which means that she is most likely to fall in the 10 per cent income-tax bracket. Therefore, she should end up paying 2.5 percentage points less of tax (on income above basic exemption limit), which is good news for her.
The second portfolio option is that she should trim her equity fund holdings to two funds. She should reduce her MIP exposure to 20 per cent of her portfolio and should spread this part of her investment across two funds. If she does this, her portfolio will also benefit from a rising stock market.
The way ahead
- Regularly monitor your portfolio because a good fund today may not remain good tomorrow
- Rebalance your portfolio at least once a year to maintain your asset allocation
- Keep sufficient cash amounting to three-four times your monthly expenses in your bank account to meet emergencies
- Once your FD/POMIS matures, consider shifting money to SCSS
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This article was originally published on November 04, 2010.
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