MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.



I have a personal loan of Rs. 4 lakh at the rate of 13.99% for which I am paying EMI of Rs. 13,699 for three years. If I close the loan after the 13th month, I have to pay a penalty of Rs. 16,000 that is 4% on Rs. 4 lakh. I am thinking of putting money in a bank FD rather than prepaying the loan. By depositing in bank FD, I will earn an interest on it with no risk. So, what should I do? Should I prepay or should I park my money in bank FD? - Ravi Dharmadhikari

At first, it is important for you to understand all the possibilities so that it can help you in taking an appropriate decision. Let us say if you continue with your personal loan and invest in bank FD instead of prepaying the loan (Rs. 3 lakh). Here with the information provided by you, if you invest in bank FD assuming an interest rate of 7.5 per cent, at the end of the tenure your Rs. 3 lakh would have become Rs. 3.47 lakh. Here, we have not considered taxation. On the other hand, you can pre-pay the loan and start a SIP (Systematic Investment Plan) of the same amount as your EMI, i.e. Rs. 13,699 per month. Assuming 7 per cent rate of return, at the end of the tenure, you would get Rs. 3.54 lakh. So, looking at both the scenario, it is better off to foreclose the loan and start SIP in mutual funds. If you decide to continue the loan and invest the lump sum available with you in bank FDs, then you are not getting any tax benefit by continuing your loan as there are no tax benefit available for personal loans, unless such loans are taken for the business. Even the interest rate provided by the bank FDs are not that attractive and, on top of that, if you fall in higher tax bracket, you would get even lesser effective interest rate. So, it is better to prepay the loan and invest in mutual funds and the penalty amount of Rs. 16000 will be compensated by better returns from SIP investment.

I want to invest Rs. 1 crore lump sum in mutual funds with dividend plans so that I am able to get regular monthly income of Rs. 1 lakh per month in the form of dividend. Can you help me in creating a portfolio? Monthly income is a must for me along with appreciation of my capital. - Jayveer Kabra

From the information given by you, it can be assumed that you are either already in retirement or you are about to retire. First of all, you need to understand that dividend is something which the mutual funds would pay at their discretion. Say, for instance, if the fund is not able to generate enough cash flow, then they may even not pay the dividend. So, dividend is something which is not mandatory for funds to pay. However, you mandatorily require Rs. 1 lakh per month. So, in this scenario, it is better to go with SWP (Systematic Withdrawal Plan) approach. While doing so, it is important to build a portfolio of equity and debt in such a way that you can always withdraw from debt funds and the other part grows further. Say, for instance, you keep three years of expenses in debt mutual funds which, in your case, it would be Rs. 36 lakh and the balance of Rs. 64 lakh to be invested in equity mutual funds. However, this is a hypothetical example and can prove to be aggressive one. So, what you need to do is to assess your risk profile and then decide the asset mix accordingly. It is recommended to hire a financial planner or retirement planner who can help you to chalk out a plan and formulate a suitable strategy.

In the current market scenario, is it the right time to exit from large-cap funds?
- Saransh Mehra

Large-cap funds are those who invest minimum of 80 per cent of their assets in equity and equity-related instruments of large-cap companies. SEBI has defined large-cap companies as top 100 companies in terms of their full market capitalisation. As far as your query is concerned, the entry and exit from the funds must be based on two major criteria; first, if the performance of the fund is deteriorating and, second, your requirement of funds. If you have invested in a fund and it is not performing well even when the overall category is performing well, then it is better to get out of that fund. This is with regards to all mutual funds and not just in case of large-cap funds. If you require funds in three years from now, then shift from large-cap funds to debt funds and in the last one year from debt to liquid funds. If we look at it technically, then from 2009 to 2018, the large-cap funds, on an average return basis, have given negative returns only two times, one in the year 2011 and other in the year 2018. In the other years during the period, large-caps have given positive returns. Investments in large-cap funds must not be actively managed. To get better results from them, you need to stay invested for the long-term period of at least 5 years. Although large-cap funds have outperformed other equity categories in the last one-and-half year, you can still hold them for the next six months.