Me and my wife (both 35 years old) are working in a private company and our net salaries are Rs 40,000 each. We have a Rs 20-lakh home loan in SBI which is insured and EMI is Rs 16,000 per month. Last month, we sold my parents property in my hometown and we got Rs 65 lakh for that property. Can you please tell us where we have to invest the amount or shall we close the Rs 20-lakh loan? We have a 4-year old boy and a 2-year old girl. We have one 3 BHK flat in Hyderabad, Rs 4 lakh in stocks and MFs. I have Rs 50 lakh term policy and Rs 4 lakh in LIC Jeevan Anand & a Maxlife policy of Rs 6 lakh. My wife has SBI ULIP policy of Rs 3 lakh. We also have our respective company’s mediclaim policies. We have Rs 2.5 lakh in our EPF. We also have two small land plots on the outskirts of Hyderabad.
Before moving to the deployment of the property sale proceeds, I would first make some suggestions related to your insurance covers and emergency fund. You should purchase health insurance cover of at least Rs 1 crore as employer provided mediclaim policies might be inadequate to deal with rising health care costs. Insurers like Niva Bupa and Aditya Birla offer health insurance policies with base health covers of Rs 5-10 lakh and top-up covers of Rs 90-95 lakh for relatively low premiums.
You should also purchase additional term policies to get life covers of Rs 1 crore each for yourself and for your wife to ensure adequate replacement income for your dependents. Also ensure to build an emergency fund big enough to meet your unavoidable expenses for at least 6-12 months. Park this fund in fixed deposits of scheduled banks offering FD yields of 7.5% and above. Some of the banks offering such FD yields include Suryoday Bank, Unity Bank, Utkarsh Bank, Ujjivan Bank, SBM Bank, Bandhan Bank and IDFC First Bank.
Use a part of your parent’s property sale proceeds to foreclose your outstanding home loan and thereby, increase your monthly investible surpluses. Do speak to your tax consultant regarding the taxation of the property sale proceeds and whether using it for home loan prepayments can reduce capital gains tax liability. If not, the long-term capital gains derived from the property sale proceeds should be invested in the specified bonds of REC, PFC and IRFC eligible for claiming tax deduction under Section 54EC.
The rest of the property sale proceeds along with your monthly investible surpluses should be used for meeting your crucial financial goals. As a start, both you and your wife should invest Rs 1.5 lakh each financial year in PPF. This would allow each of you to claim tax deduction under Section 80C while maintaining a fixed income exposure with sovereign guarantee. You should also invest Rs 1.5 lakh per financial year in Sukanya Samridhi Yojana as a part of your daughter’s higher education corpus.
Invest your residual property sale proceeds in a large cap index fund and a flexicap fund through SIPs of 2 years in equal proportion. For this, you can consider the direct plans of HDFC Index S&P BSE Sensex Fund or ICICI Prudential S&P BSE Sensex Fund, whichever charges lower expenses, for the large cap index fund category; and Parag Parikh Flexi Cap Fund or PGIM India Flexi Cap Fund for the flexicap category. You can consider these equity funds for investing your monthly investible surpluses as well as the sale proceeds of your equity shares and life insurance investment plans. Route your SIPs through a high-yield savings account to generate higher returns during the SIP period.
As mixing insurance with investment leads to suboptimal returns and inadequate life cover, you should exit the investment plans purchased from life insurance companies and invest their redemption proceeds in equity funds. Mutual funds are much superior than insurance-cum-investment products in terms of disclosure norms and transparency in consumer communication regarding their investment style, portfolio composition, past performances and other fund management related information. In my view, you should also sell your equity shares, unless those are your high conviction picks, and invest the proceeds in equity funds.
As published in Economic Times on August 14, 2023