Dalal Street Investment Journal – July 20, 2019

DSIJ.in JULY 22 - AUG 4, 2019 I DALAL STREET INVESTMENT JOURNAL (^143)
I have a personal loan of 4 lakh at the rate of 13.99% for which I am paying EMI of13,699 for three years.
If I close the loan after the 13th month, I have to pay a
penalty of 16,000 that is 4% on4 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

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

I want to invest `1 crore lump sum in mutual funds with

dividend plans so that I am able to get regular monthly

income of `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

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 [email protected] and get your queries resolved.

A

t first, it is important for you to understand all the
possibilities so that it can help you in taking an appro-
priate decision. Let us say if you continue with your
personal loan and invest in bank FD instead of prepaying the
loan (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 your3 lakh would have become
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. 13,699 per month. Assuming 7 per cent rate of return, at the
end of the tenure, you would get 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 of16000 will be compensated by
better returns from SIP investment.

L

arge-cap funds are those who invest minimum of 80 per

cent of their assets in equity and equity-related instru-

ments 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 perform-

ing 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.

F

rom 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 `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 `36 lakh

and the balance of `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.

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