Each week, I try to answer generic questions from readers. This is part one of this week's Q and A. You can use the form below to ask your questions. I am glad that the Q and A has been received well. I have now added a link to the archives in the top menu.
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Karthik: Dear Sir, My query relates to buying a house. I keep reading about how it is financially prudent to pay rent rather than pay EMI. Considering that buying a house has always been considered the best investment, I am not able to come to terms with the advice. Could you explain whether the advice is sound and whether it is applicable in my current scenario: I am posted in Delhi for the next 30 years and am currently paying a rent of Rs.16,000/- for a 2 BHK. Wouldn't it profitable to buy a 2 BHK costing around 60 lacs, pay the EMI and sell the house on retirement(when I will be moving back to my native) rather than paying a rent that is going to keep increasing every year?
Patu: (1) buying a home to live in for 30Y is not an investment. It is a utility purchase. (2) Do not assume about what you will do 30Y from - sell and move to your native place. If, repeat if, you stay in Delhi for 30Y, that could well be your new native place. People change, circumstances change.
Buy vs rent comparisons make sense only if I buy the same kind of house (amenities wise) and pay an EMI = rent. The trouble with rent vs. buy calculations
Buy if you would feel happier owning the roof (at least your side of it!). But please understand that there is no free lunch. If you pay EMIs or work towards pre-closing EMIs, it will have an impact on your other goals. Of course, you can take a chance on your salary growing well. To buy, or to rent, that is the question.
Dr.Ganapathy: I have few debt investments,balanced fund,and a very few equity exposure.I am a retired army officer.Can you recommend one good PMS where capital gets protected and no tax implication if I invest in for 5- 8 years( I fall under 30℅ tax category).I am asking this bcos FD int has fallen so much,and paying 30% tax is not beneficial to me.kindly advice.
Pattu: How can you hope for capital protection if you invest in market linked products? You can ask the PMS to invest in just bonds and even here the capital is not protected.
Instead of a PMS, I suggest you consult one of these SEBI Registered (as Individual) fee-only (no commissions) investment advisers. They will be able to suggest low-risk, lower tax outgo products.
Abhishek Joshi: Dear Pattu Sir, I am a new reader to your blogs but now hooked on to reading your posts. I feel your way of explaining things is very simple in comparison to other such platforms. Being a professor definitely helps here. I have one question, I have taken a pension fund ICICI Pru Lifestage Pension in 2009 nearly when I started my career. The decision was not thought through and was simply done to save tax. Want to understand tax implications on corpus if I withdraw the policy. Policy term is approx 10 years for premium payment. Good Regards Abhishek Joshi
Pattu: Thank you. Surrendering would imply that the corpus received (after deductions) will be added to your income and taxed as per slab. Since the premium paying term is almost over, I would suggest that you see it through if the tax outgo bothers you. On the other hand, if you pay tax now, you save yourself from getting an fixed annuity. If you have other means to handle your retirement, you can afford to surrender.
Dilip: I have a lump sum amount in hand(say 25 L) . I am looking for regular monthly income after 2 years, is it wise that should I put all those in MIP plan for 2 years in growth option and then start withdrawing at 25K on monthly basis in the same scheme? Is there any other option /calculator available to deal with such situation? Thanks.
Pattu: I am not clear about your need. Regular income for how long? Forever? If you keep withdrawing from an MIP or any other fund, it will not last very long. In the case of MIP, the first 12 withdrawals will be taxed as per slab. Then with indexation at 20% - about 17-18% effective tax rate.
If the post tax return is 8% and if yearly withdrawals of 12 x 25K are made, the 25L will last for about 12.5 years with no inflation. You can use this to compute: Four Simple Retirement Planning Tools.
I am not sure about your requirement, so cannot comment on the choice of product. Will say this much: a withdrawal of 3L (25K x 12) on 25L (if that is the corpus) is extremly high = 12%. Mutual funds cannot be a choice in such a case. The withdrawal rates needs to be much lower (not more than 4-5%, preferably lesser) for a person to invest in market linked products. Else the risk is too high. See: When should senior citizens purchase an annuity? You may not be a senior citizen, but the arguments are the same.
Syed G Moinuddin: Dear Professor I am 67, have recently returned from a Gulf country and has Rs 35Lacs in my NRI account. I need to generate a monthly income of Rs 35K. I have no knowledge of investments or share market but learned from google/youtube that mutual funds are relatively less risky than share market and one can opt for MIP or SWP to generate income. I would be immensely grateful if you guide me towards achieving my target and advise me how and where should I invest my savings so that I may spend rest of the days of my life worry free. Best Regards Syed Moinuddin
Pattu: Kindly refer to my reply to Dr.Ganapathy above. Also the reply to Dilip maybe of interest to you.
SIVASRI: Dear prof sir, 1.since 2005 I invested based on distributor around 2laks in 30 funds,i crossed the cycle of 2008( they have not advised to invest more in that period), in 2011, I sold all funds with good returns & purchased 2nd house with loan. (2) recently i came across with u r book, and blog, slowly investing on my own. big thanks for u r book. (3) now i am of 50 years, working with pay, having pension, 2 houses, I "would like to invest say 10 laks lumpsum and & after one year, I want to withdraw some money (certain%) for donating the same to orphan students education" (on my sons name who died recently&his insurance amount rs 10 laks) my idea is my capital will not decrease much & I can donate a longer period too. (4) is my idea is correct & if so please suggest such a good fund ( though i should not ask this question, pl help in this regard how to go ahead) regards, eagerly waiting for u r suggestion sivasri
Pattu: I am sorry for your loss. If the amount you donate can be variable (in the sense that you have not promised a set amount to them), then I would recommend the monthly dividend option of a balanced mutual fund. ICICI Balanced Advantage fund (without their moneyback scheme) is a conservative choice. HDFC Prudence is a more adventurous one. Not sure if HDFC Balanced offers monthy dividends, if it does then it comes somewhere in between.
Please plan out your future needs and then invest for this purpose.
Kalpana Singh: Sir, My question is related to saving portfolio for my sr citizen mother given the falling interest scenario. She has a PPF account and certain PO schemes and now needs to invest more and is looking for options. She has started investing 10% of her savings in a diversified fund, 5% in MIP funds, , 20% PPF , 50% if FDs. Now she is looking for which type of debt funds to start investing? Goal is to minimise taxation and returns of 10-12%. She will be investing by SIP route. After the recent RBI announcement of fall in interest rates going slow, many debt funds dived and this has tensed her as she would like safe funds where in by SIP route for 5 years and more should atleast give safe returns between 10-12%.
Pattu: You cannot get 10-12% returns with debt funds, not without taking risks. There is no such thing as a "safe fund". If the recent fall in debt funds has her worried then it means (1) she has invested without understanding (2) market linked instruments are not a good fit for her in this stage of life. I would suggest that she uses the Senior Citizens Savings Scheme to the maximum (Rs. 15 Lakhs).
Moving away from the security of fixed deposits just because the reward is lower is a dangerous thing to do for people unfamiliar with risks.
I shall take up the remainder of the questions tomorrow.
Suresh Nayak tells me:
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