Freefincal Q &A: Getting rid of health insurance; investing in Nifty Next 50

Each week I try and answer generic questions from readers. You can use the form below to ask your question.

Paresh Valabhbhai Chauhan: Sir, i have approx seven lac rupee in my KOTAK saving bank. I am getting 6% interest in savings account. In all banks, the FD rates are also nearly 6.5-7.5. In all liquid fund, it is nearly same. Where should I transfer money for a better return if there is possibilities of requiring this fund in next 4-8 months? Please also consider Tax criteria. I am on the border of 10-20% tax slab.

Pattu: You need the money in 4-8 months so the returns you get in that period are irrelevant. Keep it in a liquid instrument like SB account. In future, I would suggest avoiding high-interest rate SB accounts as they demand higher minimum balance and this means the net returns is well below 6%.

NAGA KRISHNA: Sir I want to save 30 K per month in debit funds for 3 years as SIP and 10 lakhs as lump sum. I fall into 30% tax bracket. 3 years looking to avoid tax on debit funds. Sir I want to take a house loan after 3 years and use this income to pay house loan. Can you kindly provide me a plan which enables to save taxes on interest as well as to repay housing loan.

Pattu:   I assume you mean debt funds. You cannot avoid tax on them, just that you will pay a lower tax on each unit that is more than 3Y old. These funds do not provide income. I do not provide investment plans. Please seek professional help from a SEBI registered fee-only financial planner.

Avinas: Are you having any seminars in August.Most people working abroad will have summer vacation in August and would be visiting india around this period.They would greatly benefit by an opportunity to interact with you

Pattu: Thank you. Unlikley as it is too late to plan for August. Probably only by year end.

Jayaraman V: Further to my earlier question, I have invested in direct plans with initial amount by cheque and subsequent month debits through ECS. The savings account is with KVB. I came to know that KVB has debited account verification charges (Rs.118/-) for each SIP. Is this applicable ? If not, who is the right person to escalate these issues.

Pattu: It is unlikely that you have invested in direct plans. The banks broker code should have got attached with your investment. Such charges are common. I would suggest that you stop investing anything via any bank.

Sagar: Dear Mr. Pattu, do you have any excel tool which will take the list of funds in one’s portfolio and the respective investments in each of those funds and then list out the exposure to individual stocks/sectors that the funds have invested in (as a percentage of portfolio)? Do you think such a tool will be good and serve some purpose to measure the degree of diversification in the portfolio? I tried to modify your portfolio overlap analyser but without any success. So, curious to know whether you have any such tool already. Background: A midcap fund in my portfolio has quite some overlap with the large-cap fund which also has an overlap with balanced fund. So, I am not quite sure that my portfolio is adequately diversified.

Pattu: I don’t have any. Not hard to make one but you can see this in Value Research portfolio tracker, so I don’t have any motivation to do this unless I can offer something unique.

K. R. Suryanarayanan: I have been reading freefincal for some time and I find it very interesting and useful. Recently I read that ETFs based on Nifty Next 50 have generally been giving very good returns and worth considering for investment. I plan to follow this advice. I find the logic also very attractive as there is a built in mechanism for weeding out laggards (whenever a stock goes below top 100, it gets removed) and also for booking profits from over valued stocks (whenver a stock enters the top 50, it gets removed). Plus there is the added attraction of low management fees. Now coming to my question, I was comparing 3 Index funds based on Nifty Next 50: SBI – ETF Nifty Next 50, ICICI Pru NN50IF (G) and ICICI Pru NN50IF – Direct (G). My understanding of Index Funds is that they mirror the specified index faithfully and hence their returns must be identical. However, I find that the SBI fund has done much better than the ICICI fund, the 2-year return is almost 1% more. In fact the SBI fund which is not a Direct Fund, has done even better than the Direct Fund of ICICI. How is this possible? Can you please explain. Regards, K. R. Suryanarayanan

Pattu: (1) I would suggest using index funds instead of ETFs as they are messy instruments where buying and selling index units is up to the units holders.

(2) Market cap has little to do laggards and profits!

(3) low management fee implies zero risk management. The assumption that an index fund will beat active funds over the long term ignoring intermediate risk management is simplistic.

(4) The SBI index fund is younger than the ICICI fund. The ICICI fund has about 1% more cash than the SBI fund and the exact return different in the last 1Y is only 0.66% (bet regular plans). I won’t worry too much about this as it will get sorted out over time. The SBI fund has too low an AUM to warrant consideration.

AriesMan: Pattu Sir, Appreciate your view on my situation: My family has 3 members, all in good health (age: 51, 43, 18) and we also are very focused on maintaining it After studying med insurance policy problems, I decided to not renew my health insurance(since 2014) but instead setup a 2-fund medical corpus with 20L allocated as follows: 1. Debt 50% ie 10L Birla Sunlife Treasury Optimizer 2. Balanced 50% ie 10L ICICI Pru Balanced I hope the growth will accumulate enough to fund any medical needs in the next few years. I will review costs and probably hike the corpus to 30L or 40L after 2021.

Pattu: You will need to keep adding to this corpus each month to ensure any withdrawals in the near future can be compensated. If you can afford 20-40L just for this purpose and account for other kinds of emergencies and financial goals from funds elsewhere, then it is a plan.  However, change in a person’s health is not in our hands only. So you are taking a big chance. Do not do it because you think you can control your health by maintaining it. It is not as simple as that!

Mahavir Gusain: When looking at looking at rolling returns/outperformance of equity or equity oriented balanced funds, which period should be given more importance, last three years, five years, seven years or longer periods? Some funds have better returns over three or five years. Others have better returns over longer periods but not as good returns as some funds over shorter periods of three or five years.

Pattu: This is the reason why I mention outperformance consistency as a percentage over 3Y,5Y and 7Y periods in the monthly fund screeners. So instead of looking at returns or outperformance over a period, we look at its record over all possible 3/5/7 year periods. I would consider any fund that has an outperformance of above 75% or so in each of these periods. We are looking at past performance, so a broad indication of consistent performance is good enough.

Ashok Kumar Gupta: Please advise whether one should subscribe to Axix Bank Dynamic Fund NFO

Pattu: I will not provide specific investment suggestions and have indicated my impression about the fund here: Axis Dynamic Equity Fund NFO: Investment Strategy Analysis

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