I expect to receive around Rs 75 lakh from the sale of an apartment. I do not intend to invest in another property. How do I invest this lumpsum amount in financial instruments? I am 47 years old and wish to adopt an aggressive style of investing.
You should first check your long-term capital gains (LTCG) tax liability, if any, arising from your apartment sale. Section 54EC of IT Act allows taxpayers to reduce this tax liability by investing the LTCG of up to Rs 50 lakh arising from the property sale in the specified bonds of REC, PFC and IRFC within 6 months of the property sale. These bonds have a lock-in period of 5 years and generate a taxable interest income of 5.25% p.a. However, I personally do not prefer these capital gains bonds due to their long lock-in period and very low post-tax returns. I would instead prefer to pay the LTCG tax and invest the LTCG component in high return instruments like equity funds.
You can also use your apartment sale proceeds to build/boost your emergency fund adequate enough to meet your unavoidable monthly expenses of 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 high FD yields include Suryoday Bank, Unity Bank, Utkarsh Bank, Ujjivan Bank, SBM Bank, Bandhan Bank and IDFC First Bank.
Also check whether you have adequate life and health covers. Your life insurance cover should be at least 10-15 times of your annual income to ensure adequate replacement income for your dependents. Opt for term insurance plans as this offer large life covers at very low premiums. Purchase health insurance cover of at least Rs 1 crore 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.
The rest of your apartment sale proceeds should be invested entirely in equity mutual funds, provided you have an investment horizon of at least 5 years. You can spread your equity fund investments in flexicap, large cap and ‘large & midcap’ funds in the proportion of 50:25:25 through SIPs of 12-18 years. You can consider direct plans of Parag Parikh Flexi Cap Fund and PGIM India Flexi Cap Fund for the flexicap category; Mirae Asset Emerging Bluechip Fund and ICICI Prudential Large & Midcap Fund for the ‘large & midcap’ category; and HDFC Top 100 Fund or ICICI Prudential Bluechip Fund for the large cap category.
Route your SIPs through a high-yield savings account to generate higher returns from savings accounts during the SIP period. You can consider banks like AU Bank, Fincare Bank, Equitas Bank, Suryoday Bank, Unity Bank, IndusInd Bank and Bandhan Bank for routing your SIPs as these banks offer 5-7% p.a. interest rate on higher savings account balances.
As published in Economic Times on August 21, 2023