The current portfolio has enough exposure in fixed income assets such as PPFand bank FDs. Fixed income assets provide the stability with low volatility to the portfolio but the downside is they are not able to outperform the inflation. On the contrary, they are not even able to match inflation. And it is important that going forward you need to match inflation if not outperform tax adjusted return. And hence what you have proposed—to invest partially from bank deposit in equity-based mutual funds is a correct decision. However, as the amount to be invested is lump sum, it is good to stagger the purchase and this can be done by using systematic transfer plan (STP). This plan is structured by first investing in debt ultra short-term funds which are then systematically transferred over a period of time in the desired equity fund. This transfer can be done over a period of time—you can consider a period of one year for doing this transfer. And the asset classes which can be picked up with equity category are large-cap, multi-cap and even hybrid funds. The said portfolio does require a review every six months to ensure underperformance, if any, can be taken care of. Also, make sure that all your investments have your spouse as the second holder with either or survivor option or as a nominee. It is also recommended that you do a Will for yourself as well as for your spouse.
You should review your portfolio after every six months
I am a senior citizen and in the 30% tax slab. Is it wise to go for non-convertible debentures (NCDs) at 9.65 % for five years of ECL Finance or any similar non-banking finance company or should I buy tax-free bonds in the secondary market? Are tax-free bonds more beneficial for the purpose of income tax? If yes, what is the percentage yield of yield-to-maturity/coupon rate?
—K. Ravindra Reddy
NCDs have two components of income. Firstly, the interest earned as per the coupon rate. So if the interest offered by NCD is 9.65%, this becomes part of your taxable annual income and is taxable as per your marginal rate of tax. Secondly, if you sell the bonds in the secondary markets, there could be a capital gain. Capital gains would be treated as short-term capital gain if NCDs are held for less than 12 months from the date of purchase and again will be taxed as per your marginal rate of tax. If the NCDs are held for more than 12 months at the time of transfer, then it becomes long-term capital gains and would be taxable at 10%. However, the benefit of indexation would not be available. Also, it is important to consider the interest rates but not at the cost of credit risk, so do check the credit rating of the company before buying the bonds.
Tax-free bonds offer regular tax-free income and are typically issued by government agencies like IRFC, PFC, NHAI and NTPC, besides private players. The interest paid out being tax-free, these bonds are quite popular investment vehicles for high net worth individuals. These bonds carry tenure of 10/15 and 20 years and are also trade able securities in the secondary markets. Their credit risk also needs to be checked as interest rates depend on that—lower-rated security will carry a higher coupon rate. These bond offers are more suitable for investors in higher tax slabs. But they are not high on liquidity and are not an asset class which can be used to create long-term wealth. If we compare NCDs with tax-free bonds, you have to weigh the above to decide what suits your profile as it is not just about the interest rate.