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 am a senior citizen, aged 66 years, with no other source of income except for interest on post office deposits along with monthly EPF pension of Rs2,114, which is very meagre. Nowadays, day-after-day the interest rate on fixed deposits is being reduced by the RBI. Therefore, I request you to kindly suggest investments in mutual funds which would be suitable as per my Reg. monthly requirement along with safety and growth of funds invested in. At present I can invest Rs5-10 lakhs.

- Hemantkumar Vyas

There is no straightforward solution to this as retirement planning or financial planning is quite personalised in nature where things differ from one person to another. Further, your monthly or annual cash flow requirement is also unknown. Therefore, it makes it even more difficult to suggest you anything concrete. However, based on the information provided, we would urge you to get your risk assessment done which would help you to understand your risk appetite. This can be easily done online free of cost. That said, in the retirement phase with limited income sources, protection of capital becomes the topmost priority. Therefore, in such cases, risk appetite is at the conservative end.

Further, you also need to compute your monthly requirement because if that is higher than what you can get from your invested assets, then there is a problem. The solution for this though can be to lower your expenses further. Also, while calculating your expenses do assume healthcare expenses as affordability of health insurance would be a prime consideration. If we assume Rs20,000 as your monthly expense, your investment can maximum remain sustained for three years. This is assuming that for your next three years the required 5 per cent inflation-adjusted expense is invested in debt (at the rate of 8 per cent) and the remaining is invested in equity (assuming rate of return of 10 per cent).

Therefore, with this setup you would barely be able to manage four years of expenses. If your expense is above Rs20,000 the investment sustainability would further deteriorate. Therefore, to be very realistic on the expectations front, we would suggest you to increase your investment capital. Just to give you an idea, if your investment capital is around Rs20 lakhs then you can fund inflation-adjusted Rs20,000 expense up to the age of 77 years.

If we assume your life expectancy to be 80 years, you would at least need to invest capital of Rs23.5 lakhs to be able to receive inflation-adjusted Rs20,000 per month till you reach 80. Remember, if your expense is higher, then your required capital investment too would be higher. It may come down proportionately if you deduct the EPF pension that you are getting. In a nutshell, you have to invest in both debt funds and equity funds to get the required amount. Investment done in debt should be for the short term and in equity it should be for more than three years.

Why are most of the fixed maturity plans (FMPs) performing so poorly? Is it the dead-end for such schemes? I have invested in three such schemes and am now stuck. These schemes were launched with a lot of hope and promise. What are your thoughts on the same and would it be right to exit from them?

- Rajnish Vora

Fixed maturity plans, popularly known as FMPs, have earned a bad reputation in recent times, especially in the aftershock of the DHFL defaults and Essel Group’s loan against securities fiasco. And the disturbing thing is that many FMPs were found to have disproportionately high exposure to these kinds of issuers and they paid the price for it. This has caused a lot of anguish among investors. Further, issuers defaulting or delaying the payments has led such FMPs to default or delay their payments to unit holders. In principle, FMPs are not a bad product as such. In fact, they were quite suitable for somebody who has a defined investment horizon to earn a much predictable return.

Some fund managers threw caution to the wind and basically violated the principles of prudence and diversification while building FMP portfolios. And when these issuers defaulted, investors or unit holders had to pay the price for it. These days there are hardly any new FMPs hitting the market. To consider what you can do with your existing investments in FMPs, theoretically, there is an exit route available via stock exchanges because all closed-ended funds, including FMPs, are mandated to compulsorily list on a stock exchange to provide an exit window.

But practically speaking, there is hardly any liquidity available in FMPs and if there is any, it may be available at a discount. So this exit option makes no sense to you. Therefore, there is really little that you can do but to continue holding them till their maturity. Furthermore, depending upon when these FMPs came out, when you invested in them and how well they have been managed by the fund manager, they might not prove to be a bad investment from a yield perspective. This is assuming the kind of interest rate scenario we are presently in and the kind of yields that you would otherwise get on open-ended funds. Hence, from that perspective, they may not be such a poor investment if you hold them till maturity.