Several readers seek to understand avenues for investments early in their careers. Please refer https://bit.ly/InvestmentBeginner or scan the QR code accompanying this article.
Q. I am 27 and I work in an MNC. I earn ₹42,000 a month. Both my parents are retired and dependent on my income. I spend about ₹10,000-₹15,000 a month. I have previously tried saving via FDs and RDs. Could you suggest an investment avenue that can earn returns such that my parents get a monthly income of ₹10,000-₹15,000?
Aishwarya Kumar
A. It will take a few years to build a corpus that is large enough to yield a monthly income of ₹15,000 for your parents. Two safe options to consider for setting up the pension are the Post Office Senior Citizens Savings Scheme (SCSS) and LIC’s Pradhan Mantri Vaya Vandana Yojana. In the latter, you can deposit up to ₹15 lakh in the name of each of your parents, if they are above 60, to yield a return of 7.4% per annum. Currently, if you deposit ₹15 lakh, your parents will get a monthly pension of ₹9,250 from this scheme for 10 years. The SCSS, also available to seniors, offers 7.4% for 5 years, a tenure that can be extended. This scheme requires you to open an SCSS account under your parent’s name with an authorised bank or post office, which then credits quarterly interest into their savings accounts. Both these options score high on safety on account of central government backing. You can start making deposits in these avenues so that the pension amount eventually reaches your target.
Besides, you can consider debt mutual funds that invest in highly-rated instruments. Presently short-duration debt funds, floating-rate debt funds and funds that invest in PSU bonds and State Development Loans are good options that can earn you a market-linked return. You can either park a lump sum in such funds or invest regularly through systematic investment plans in their growth plans to accumulate a sufficient corpus. At the end of 3 years (for tax efficiency) you can set up a Systematic Withdrawal Plan (SWP) from these funds that can double up as regular income for your parents. Assuming an annual return of about 6.5%, an investment of about ₹20.5 lakh will be needed to set up a ₹15,000 per month SWP for 20 years.
Q. I am a director at an NBFC. I am 64. Three years ago, I bought a flat on a home loan of ₹25 lakh and am paying EMI of about ₹20,000. My salary is ₹40,000 and I don’t have other planned investments. At this age, I am spending half of my earning on EMI. Given my pay levels, the income tax benefits I get on interest are limited. Is it advisable to quickly prepay the home loan or to invest in some other avenue?
Vijayakumar K
A. Though the effective interest rate on a home loan may be quite low if you took it in recent years, it appears prudent in your case to quickly prepay the home loan if you have a surplus, before stepping up investments. Many folks make the argument that as long as your investments can earn higher returns than the interest cost (after tax breaks) that you incur on a home loan, it makes sense to invest your surpluses instead of prepaying the loan. However, there are qualitative considerations that lead us to recommend prepaying the loan. One, given your age (64) it may be difficult to predict how long you may like to sustain your current career or work profile in future.
Health conditions cropping up for yourself or family members, may, for instance, intervene to require you to scale down your work commitments. Having a fixed EMI hanging over your head for the next 10-15 years would rob you of the flexibility to take such decisions, as you may be forced to keep up your income levels to meet the loan repayment obligation. Two, while the interest you incur on your home loan is a certain outgo, there’s a lot of uncertainty attached to the returns you may end up earning on investments you make now, especially if you choose to make investments in mutual funds or other market-linked avenues. Prepaying a home loan would yield you definite savings of ₹20,000 a month. Three, prepaying the home loan and clearing the mortgage would enhance your family’s security and endow you with more peace of mind. It may also be prudent to take a term-life policy for the outstanding loan amount, if you are unable to prepay it in full.
Q. I am a 30-year-old State government employee. I earn ₹5 lakh a year. Kindly suggest the best investment avenues for getting good returns.
Vamshi Reddy
A. You must already be contributing to a PF account through your employer. Before adding on other investments, it would be good to buy a term life insurance policy if you have dependents, and health insurance to cover you against sudden medical expenses in case you switch jobs. It is also essential to have an emergency fund of up to 12 months’ expenses parked in an FD or other safe avenues.
Both the Public Provident Fund and SIPs in equity funds are good options for starting investments. However, before initiating such investments, it would help to map out your financial goals and the time horizons in which you would like to achieve them.
Do read our earlier article (refer URL / scan QR code alongside) to know more.