ET Wealth’s panel of experts answers questions related to any aspect of personal finance every week.
I am a pensioner and had invested in an international fund for five years to supplement my income. What should be the redemption strategy?
Prableen Bajpai, Founder, Managing Partner, FinFix Research & Analytics, replies: There are three factors to keep in mind while redeeming from an international fund. First is taxation. Although international funds provide equity exposure to markets abroad, they are classified debt for taxation purposes. Thus, any gains from an investment redeemed before three years will be taxed as per income slab, while post three years, it will be taxed at 20% with indexation. If your investment was made via lump sum five years back, it would qualify for indexation. However, if it was a SIP or STP, be mindful of the holding period. A Systematic Withdrawal Plan (SWP) will lower your tax burden if spread over a period of time since only the ‘gains component’ in each SWP will be taxed. The next factor is the receivable time of redemption proceeds, which is usually T+4 or T+5 days vis-à-vis T+3 for domestic equity (T being the trade day). The third is the currency movement. Any depreciation in INR against USD will add to your returns and vice versa. Thus, you are better off redeeming when the rupee is weak.
I have Rs 5 lakh to invest. Should I start a bank FD? Once the deposit matures in 4-5 years, I plan to use the money to prepay my home loan. Else I can prepay Rs 5 lakh now towards my ongoing home loan. The outstanding amount is Rs 95 lakh at 7.35%. What should I do?
Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com, replies: Avoid the first option as fixed deposit rate for 4-5 years is 5.30-5.50%, significantly lower than the current interest rate of your home loan. The decision to prepay the home loan should be based on the adequacy of your corpuses for crucial goals like retirement, children’s education and marriage etc. Use online calculators to find out if they are adequate. If not, invest the surplus for these financial goals. Currently, home loan rates are approaching historic lows. Moreover, quality equities are still available at attractive valuations. Hence, investing your surpluses in equity mutual funds in a staggered manner now may help you create greater wealth over the long term. Consider home loan prepayments only during a rising interest rate regime coinciding with equity markets in expensive valuation territory. Invest surpluses in the direct plans of multi-cap funds. Try to stay invested for at least seven years to derive maximum benefit.
I opted for the Senior Citizen’s Savings Scheme in August 2015 at 9.3% interest rate. I want to continue for another three years. Will it continue to give 9.3% or less?
Jayant R. Pai CFP and Head, Products, PPFAS Mutual Fund, replies: Even though you currently earn 9.30%, the interest rate prevailing in the quarter in which you choose to extend the tenure of the current investment will apply post maturity. For instance, if it is 8.20% in that quarter, you will receive 8.20% for the next three years. To extend the account for three years, you have to submit an application by filling Form B. This has to be submitted one year prior to the date of maturity of the original five-year deposit.
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