How would you invest if you suddenly got one crore?

How would you invest if you suddenly got one crore? That is a nice thought is it not? In this weeks Q & A, we consider what should a sudden crorepati do, along with other questions. Perhaps you may have seen it already, this is my article in the Economic Times: Mutual fund advisers earning commission from AMCs may not give you the best advice. Thanks to Dr. Narendra Nathan for the opportunity. Readers may be aware that I had earlier written in ET about:  Why investing is not only about equity.

If you have a generic question on personal finance or investing, please use the form below. Also let me know If you have any suggestions on videos that would benefit investors. You can check out the videos in the freefincal youtube channel

 Dear Pattu, I am retiring next month. I have made a retirement folio with 60 : 40 debt equity composition which should be good enough for me in next 35 years as per your robot advisory. I have kept three years of expenses separately so that my folio grows for three years before I start withdrawal. The question is where should I keep my three years expenses, ie in SB acct or FD(ladder) or Arbitrage MF or liquid fund. I am slightly confused as I will be in 20% tax bracket for next three or four years and then to 30% bracket.

Pattu: Sir, I cannot answer this off hand, but will say this much. You can use either arbitrage or liquid funds to meet expenses on a continuous basis. This will be your income bucket. You can add more to this income bucket from the rest of your folio from time to time. While withdrawals from arbitrage funds of units ages more than 1Y are tax-free, even partial withdrawals from arbitrage and liquid funds can reduce your tax outgo.

However, it all depends on how much is your income from rent and interest-based investments. I would recommend an opinion from a fee-only financial planner to validate your plan.

Nilesh Gadge: Sir, How to compare volatility between two different asset allocation using excel?

Pattu: Hi Nilesh,good question! To compare two different portfolios, you need data of their value on different dates for say a year or so. Then you can take weekly returns or monthly returns and calculate the standard deviation. This is a measure of volatility.

Dilip: I was looking at my portfolio and confused about return with respect to expense ratio. Direct plan expense ratio are lower compare to regular plan that is clear but among direct plan schemes is there any tool so far developed on ” Expense Ratio and Performance Analysis”, which can compare result among 3 to 5 schemes. To decide switching from higher expense ratio to lower expense ratio scheme under the same category with better performing scheme so as to optimize the return? Is it worth to develop such tool?

Pattu: I would switch to an actively managed direct fund that for an expense ratio offers the best return per unit risk taken. Quantum Long Term Equity is a fund that offers the best of both worlds: low expense ratio and very good downside protection in the large, mid-cap segment. On the other hand, Parag Parikh Long Term Fund is high on expenses and also offers good diversification in the mid-cap segment. We can infer this from their performance.

Dabbu: Hi Pattu, I have been tracking a specific liquid fund for about 3 months. Over this period, I recently noticed that it was downgraded from an average credit quality of AAA to AA. I have a 2-part question – 1) Is this a big deal? How much should this downgrade affect my decision in investing in this fund? Is it a concern? I see the returns from this fund are still quite good. And 2) I don’t see any change in the portfolio or credit rating break-up. How’s that possible? Thanks.

Pattu: The returns from the fund are good because it shifted down in average credit quality! You can check the full portfolio from the fund factsheet at the AMC site. Is this a big deal? Yes.  Keep an eye on the fund. If you see the credit quality slip any further, exit.

Read more: Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds

Chandrashekhar: I had a question on solid gold as an investment, and I hope you could throw some light on this. Off late, there are many videos on you tube (by Mike Maloney), books and Forbes articles (by Jim Rickards) on why we should invest in gold. However, it looks like the prices of gold go up and down more drastically than the stock market, and that in the past 5, 10 and 20 years, gold has fetched lesser returns than even an FD. However, some other websites seem to paint a different picture and seem to have graphs that suggest that gold has appreciated! Knowing that in India, gold is almost as liquid as a bank FD (sometimes even more liquid!) – unlike other countries, Could you please tell us more whether it is advisable to invest in gold (say 5% of ones savings) instead of an index fund or FD? Thanks a lot.

Pattu: Yes, Gold is riskier than Stocks! That is, as an investment. This holding 5% gold is a safe haven. That is, when all else fails, this 5% exposure will appear big! It will only appear so.  All else failing = when our currency becomes worthless. Then we would need a whole lot more gold (physical gold, not investments). You can hold gold (track price) for diversification, but personally, I do not see any benefit in it : Should gold be part of your long-term investment portfolio?

shaNmukh: Hello sir Hi Iam 24 year old male earning 17KPM in hand I get 15.4 KPM.i applied for online term insurance from ICICI Iprotectismart.I applied for the cover of 50 lakh for a premium of 396 rupees. But the company offered me 45 lakh cover for premium of 497. Now they reduced the cover and increased the premium. Should I go with this plan ? I don’t consume alcohol and tobacco. Your advice is highly appreciated. Thank you. Waiting for your reply.

Pattu: The insurer is right to offer only 45 lakh (or lower) as it depends on a person’s income: Typically 15 times annual income or maybe 20 times at best. Sometimes when the cover is reduced, the premium goes up! It could be due to other factors  in your application.

$udhakar: Looks like HDFC Equity and ICICI Prudential Value Discovery are moved to Large Cap category from Multi Cap. Of course VR has same info. I am not sure if actual fund houses re-classified or not.

Pattu: Do not take classification by star rating portals seriously! Let the new SEBI classification kick in first.

SD: Thanks to your in-depth coverage of MFU when it went online, I have an account. Recently I noticed a myCAMS app that claims to allow investments through the app. How is it different from MFU ? Thanks in advance, SD

Pattu: CAMs is a registrar and transer agent. That is,  it is a record keeper for few fund houses. While they do not get commissions, they will earn for record keeping when more investors choose the funds they manage. CAMs is good way to invest in direct mutual funds.

DILIP: Recently it has been declared by Government that in PPF investment is not been accepted by NRI. My question here (1) How do government earn and where do that invest PPF fund money to get between 8-9 % fixed return? Is there any statistics available for government investment with respect to ppf fund availability with government? (2) What is the actual/possible reasons – why government decided for this action? (3) There are certain group of people those who are not much aware about market and not interested to invest money in market, for them this really big loss for investment option. What they can do? Thanks.

Pattu: I do not know why NRIs were forced to close small savings accounts like PPF and NSCs. Perhaps because they were “small savings”. How does the government earn from PPF? All small savings investments get pooled into a small savings fund. This is then lent to states governments primarily at a rate about 2% higher than PPF rate.

kalai: How to prioritize the investments to emergency fund vs other long term goals. Say for instance, I am able to fund all my long term goals, and do not have anything left for emergency fund.

Pattu: Emergencies will not wait, so divert some money to an emergency fund and continue investing.

S Kannan: Seeking clarification – Are you providing the plumbline as an investment advice? If so, are you registered as an investment adviser with SEBI?

Pattu: PlumbLine is a list of select mutual funds. I do not ned to be registered as an investment adviser with SEBI for publishing this:

“investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning:

Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations; SEBI Investment advisor regulations

Ankit: In liquid funds with weekly dividend reinvestment options, NAV grows for a week then falls and it repeats. Lets assume NAV goes from 100 to 110 . I invested at NAV of 105 for some time (< 3years). I get units cause of reinvestment at NAV of 100. So assume I have 50 original units + 3 reinvested units. If I redeem at NAV 108, will i have to pay stcg for 50*(108-105) + 3*(108-100)?. If instead i redeem at 102. Can 50*(102-105) be considered as loss? I know dividends are tax free (since dividend tax already payed by ACM), am interested in cg due to weekly NAV changes.

Pattu: You will have to consider the age of each unit to determine whether the associated capital gain (or loss) is long term or short term. Then you separate STCG(or L) from LTCG(or L) and pay tax accordingly. If you have all transactions handy, you can enter it in this Mutual Fund Capital Gains Calculator and see how this works.

Dilip: My fund is among the top 3 in case of returns of 10Y period,otherwise it’s lagging behind in 3y and 5y returns… difference is 5%. It out performed benchmark in 3y,5y,and 10y periods. There is a change in fund manager . Shall I stick with the fund ?

Pattu: I would only worry about consistent benchmark outperformance in terms of risk and reward. Peer performance or who the fund manager is does not matter.

Vasuki Rao: Recently you wrote about how you would invest a lump sum in equity mutual funds. Suppose you were to get an inheritance of Rs 1 crore, how would you invest such a large sum? Thanks.

Pattu: That is a nice thought! Here goes:

1: Get the documentation on the inheritance clear. If the money is from a direct relative, it is tax-free, else taxed as per slab.

2: Avoid all contact with sales guys as news travels fast

3: Relax and don’t be in a hurry to invest. Time is money and money is time, but a month will not hurt, especially a crorepati.

4: Investing starts and ends with asset allocation. In this case, it is a three step process.

(a) how much of that one crore is going to be within the family? How much of it is going to be given away as charity? Yes, paying it forward is important.

(b) Out of the amount to be within the family, how much will be assigned to each financial goa? Yes, a list of goals is important

(c) Out of the amount assigned to each goal. how much should be invested in each asset class?

5: If you decide to buy some real estate with it, put that portion in a liquid fund or arbitrage fund and scout for property in peace with legal assistance.

6: Once the investment avenues are decided, it can be done in one-shot if it is fixed-income.

7: If it is equity, gold, bitcoin etc. it depends on your perception of a lump sum. For someone who has never been a crorepati before, a 25 Lakh investment in equity is a big amount. So the investment can be staggered over a few months. STPs do not accomplish much other than psychological superiority. If a crorepati gets another crore as inheritance, then that 25 Lakh should seem small.

8: The above steps are the same whether it is an inheritance of one crore or one lakh, whether it is a bonus or a monthly salary 🙂

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