Creating a Pension Fund


I am 59 years old and wish to retire in February, 2010. I want to create a pension fund and also seek regular tax-free returns from my investments in mutual funds. I own a house and don’t have to worry about any liabilities.

H. Rao Yadavalli

Your retirement is virtually round the corner. You have not left too much time for maneuvering your investments. Therefore, at this point in time, utmost priority must be given to sourcing a regular income for you, which should be backed up by safeguarding your capital.

Regular income

You can invest in Senior Citizen Savings Scheme (SCSS). The investment limit for this is Rs 15 lakh and it will give you an interest of 9 per cent per annum. While the remaining amount (Rs 2.92 lakh) can be kept in a FDs. Your annual interest from SCSS will be Rs 1.35 lakh, which will translate into a monthly income of Rs 11,250.

The investments under SCSS will fetch you a tax deduction under 80C, but the interest income will be taxed as per your tax slab. But if do not have any other source of income, the total income will be tax free. That is because, for senior citizens, total income up to Rs 2.40 lakh is tax exempt from this year onwards.

Tax free, but…

If you want a totally tax free income, then invest in equity, as it provides exactly that - in equity dividends, as well as capital gains, after one year are tax free. But the problem here is that returns from equity are highly volatile and high on risk. You may not be able to get regular income and capital safety, which is very important for you.

Mix-&-Match

The other option that is open is that you retain your Rs 6.50 lakh in FDs and also the investment of Rs 11.42 lakh in equities and mutual funds. You may withdraw a maximum of Rs 1.80 lakh annually from your FDs investments — it will provide a monthly income of Rs 15,000 to meet your most essential or necessary expenses. However, you must replenish your FDs, in one-or-two years. This money can be sourced from your gains that would be booked from your equity investments.

Portfolio Observations: Clutter Problem

Diversification is good but too much of it will only add to unnecessary paper work and management issue. Currently, you are invested in 17 funds. But having around seven to eight funds will provide you more than enough diversification.

New Fund Investments

There are two 5-star funds (rated by Value Research), four 4-star funds, and five 3-star funds in your portfolio. However, you have also invested in four other funds that are not rated at all. Since that signifies taking risk, which is to be avoided by you, so, always invest in funds which have a performance record that can be tracked.

Thematic Funds

An investor can have a small exposure to thematic funds and its good to see that you have restricted that up to 10 per cent of your portfolio and that too in infrastructure theme (which is pretty broad theme than other sector funds). But you have exposure to three funds in this space (Reliance Infrastructure, DSPBR T.IG.E.R. and SBI Infrastructure Fund Series I). This is unnecessary repetition. If you want to take exposure to a single theme, one should be sufficient.

Close-end Fund Investment

You have invested in one close-end fund — SBI Infrastructure Fund Series 1. As one can only invest in a closed-end fund during an NFO, so one cannot evaluate their performance before investing and they generally have a high exit load on redemptions made before maturity.

Lump-sum Investments

You have made lump-sum investments in mutual funds. That is akin to trying to time the markets. One should not try to do that. Always make investments in a systematic manner. Investments through systematic investments plans (SIPs) are ideal as they give you the benefit of rupee cost averaging.

Stock Situation

You have invested directly in stocks and they account for around half of your combined investment in stocks and mutual funds. One should invest in stocks directly only if one has the time and expertise to review investments.

Unhinged Allocations

Since you have invested in a large number of funds and also in stocks separately, your portfolio is exposed to 287 stocks. Out of these your top 15 holdings account for 60 per cent of your portfolio while the rest have less than one per cent exposure each.

Emergency Fund

You should also make an allocation to emergency funds to meet unforeseen expenditure requirements. You should also get health insurance, if you don't have any.

ref:value research