I have an outstanding home loan of Rs 6 lakh for which I am paying the EMIs. I can afford another Rs 40,000 in EMIs. Should I use my accumulated mutual fund corpus of Rs 5 lakh to make the down payment for a new house which I want to buy as an investment?
Raj Khosla, Founder and Managing Director, MyMoneyMantra.com replies: Amid this pandemic, using surplus funds to partially or fully prepay outstanding liabilities is recommended. Do not compromise your liquidity for speculative investments in real estate. As annual rental yields are not more than 2%, it is not wise to start another EMI with an ongoing mortgage. It may take years for property prices to appreciate. Therefore, you should first cut down your monthly EMIs, and align the surplus Rs 40,000 per month towards a mix of short-term liquid funds or bank FDs and long-term equity funds, basis your goals and risk appetite. Take care of your cash flow requirements in the short, medium and long term in preference to acquiring a property for rental income, that too with borrowed funds. Ensure that you hold adequate life and health insurance covers for yourself and family, along with emergency funds.
I am 41 and own a house with zero debt. My job pays well. My investments include FDs worth Rs 80 lakh, corporate and gold bonds, PF around Rs 57 lakh, PPF of Rs 30 lakh, NSC worth Rs 20 lakh, NPS of Rs 25 lakh, SSAs worth Rs 15 lakh. I have been investing in mutual funds through SIPS (Mirae Asset Emerging Bluechip, Axis Small Cap, SBI Small Cap, L&T Emerging Business Fund, Nippon India Small Cap and a couple of large-cap and balanced funds as well) and my corpus is worth Rs 42 lakh. I have sufficient health and term insurance. I do not plan to buy another house for the next 2-3 years and would like to de-risk or dilute around Rs 10 lakh-12 lakh of my investments in FDs and reinvest them. I want to do this with an intent for wealth creation or funding my 10-year-old child’s education. Can you suggest a few options?
Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com replies: A major chunk of your mutual fund exposure is in small-cap funds. I suggest you invest your FD redemption proceeds in debt funds and then shift systematically to flexi-cap and large-cap funds. Debt funds are more tax-efficient than FDs. You can spread your investments equally among these funds —Tata Index Sensex or HDFC Index Sensex Fund; Parag Parikh Flexi Cap or Axis Flexicap Fund. In case you wish to consider ELSS funds to reduce your income tax liability under Section 80C, you can invest in the direct plans of Mirae Asset Tax Saver and/or Axis Long Term Equity Fund through SIPs. Given your income and age profile, your existing equity exposure of 16-22% of the total investment portfolio is too low.
Shifting the FD proceeds of Rs 10-12 lakh in equity funds will increase the equity allocation to 20-25%. Hence, I will suggest you to further increase your equity exposure to at least 50% of your total portfolio after setting aside your fixed-income investments for your emergency fund and various short-term financial goals. Then, spread your equity investments among large, mid-cap and small-cap in the ratio of 40:40:20. Try to stay invested in equity mutual funds for at least five years.