Investing Lumsum money – needs help

POSTED BY Bhaskar ON February 9, 2013 6:22 pm COMMENTS (10)

Hello JagoInvestor Team,

Recently, my father (age 57) sold a property for 40L and he wants to use this amount to build his pension. He does not have any other income apart from this.

My father is read to give me this money if I can give him bank FD interest rate.

Needs your help to invest this amount. I do not need this money for the next 12-15 years.

Iam providing following information just in case if it helps while you are responding.

1. I do SIP in FTBluechip, HDFC Top200, HDFC Equity, IDFC Premier Equity Plan A

2. My age is 31 and I am in 30% tax slab. 

3. Family is fully covered with health & term insurances and staying in own flat.

Thanks

10 replies on this article “Investing Lumsum money – needs help”

  1. Dear Bhaskar, wait, I did ask you to not indulge in money receiving & then paying interest to your father but do not leave it totally to your father that what he is doing.

    Please ask him, how much mly income is needed for support of his life style? How much he is generating already from pension & other things? How much short fall is there? Where he want to invest on his own, if given a chance?

    Thanks

    Ashal

  2. Bhaskar says:

    Thanks Ashal for bringing it up. I convinced my father to deal with his own money as FFC suggested.

    1. Ramesh says:

      By the way, what I have mentioned above was basically from his point of view only. But still do the exercise so that you and he are clear.
      Putting money in a simple debt instrument ( like senior citizens scheme) is not the best idea, for me.

  3. Dear Bhaskar, what ‘ll your father do, if after initial few months, YOU stop paying him the interest?

    Now do not tell me that you are honest & an obedient son. I’m discussing here the plain human psycology.

    Thanks

    Ashal

  4. Bhaskar says:

    Dear FFC – I understand what you are saying. Thanks for that.

    Dear Ramesh – Thanks a cart detailed explanation. I could not have asked for more.

    Dear Ashal – This amount is post tax returns. I will be giving bank FD interest equivalent money to my father from my salary. I do not need this money for next 12-15 years.

  5. Dear Bhaskar, what about tax liability on that 40L Rs. from sell of property, received by your father? What’s your father’s exact need, a mly pension to support his other income or a growth in his wealth?

    Please clarify.

    Thanks

    Ashal

  6. Ramesh says:

    I. Keep 2 years requirements in short-term bond funds.
    II. Keep next 3 years requirements in Income funds.
    III. Keep rest of the money in two funds – one an income fund and the other a conservative equity fund. My preference is have a 50:50 allocation between the two.

    I assume he wants 8% return on 40L. Which means 3.2 Lakhs. So, I would do like this:
    1. 2 years money (=6 Lakhs) in Templeton Low Duration Fund – growth option
    2. Next 3 years money (9 lakhs) in Templeton short term Income Fund – growth option.
    3. Rest of the money (25 Lakhs) split into Templeton Income Builder Fund (12.5 Lakhs) and 12.5 Lakhs in Franklin Blue Chip Fund.
    All in Direct fund Growth options. No dividend or anything.

    How to Get Money:
    1. Withdraw from Templeton Low Duration Fund. Set up a SWP from that fund, starting from 3 months down the line (since that is the period of Exit Load). You can keep 25k in the bank account directly initially too.
    2. Every year check I, II and III in that order.

    How to Change Over:
    a. So next year at the periodic review, you find, that the amount of money in LDF is 3 lakhs. So you shift money from fund 2 to 1, as per your requirement. And start the next year’s SWP.
    b. Then you check total amount in 2 for next 3 years and calculate the deficit.
    c. Then you check the balance amount in group 3 funds. To complete the deficit of b, you remove that much amount from both the funds, which will fulfil the requirement of balance between the 2 funds here. So, if blue chip fund is 14L, and Income builder fund is 13L, and your deficit is 3L you remove 2L from BCF, and 1L from IBF.
    Another scenario, the BCF became 11L (loss of 10-15%), and your IBF became 13L, then you remove 2.5L from IBF and 0.5L from BCF, so that they become 10.5 each and balance each other.

    You can directly transfer this amount to LDF fund also. But all your calculations have to progress on these lines.

    Benefits:
    1. Since there is a single AMC, you can do all these things very easily.
    2. It may happen that there canbe losses in the Blue chip fund for 2-3-5 years, but overall, your cushion levels are adequately protected for 5 years in groups I, II, while protected for at least 4+ years in group III.
    3. The equity component should provide you a decent above inflation return over 5-7 years periods.

    1. Sachin says:

      I am not sure about point C, do you mean we need to balance every year from 3, but is it ok to take money from equity funds every year? I am asking this just for my information..no real time scenario 🙂

      1. Ramesh says:

        Yes, you need to do that for the simple reason of maintaining the proposed 50:50 balance in 3 while maintaining the cushion levels in 1 and 2.

        In one or two years, the amount in 2 will help too.

        Do one thing, why don’t you do this from say year 2004 or 2005. Use nav values from vro. Take another equivalent fund, if one of these is not available. Then put it here or in a Google spreadsheet. Should reveal us a decent overall picture.

        Overall the equity portion is around 30%. Even if you out your money in a hybrid fund and withdrawing from that, you still are removing money from the equity component every year.

        But let’s try the above run from past and see how it fairs.

  7. The money is needed for your father as pension. He should invest more than 80-90% of the money in safe instruments like monthly income scheme from PO and then later with senior citizen scheme when he becomes eligible.

    The rest of the money (10-20% only) for his later use (depending how much his present expenses are) could be invested in a balanced mutual fund like HDFC prudence/balanced for the long term.

    Please let him handle his own money. Ask him to make a will.

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