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Query Corner

Print Edition: August 2011

Investing

I wish to invest Rs 1,000 per month (SIP) for my daughter's education. She's two years old. What would be the best asset allocation plan for this? -Sanju Kumar, Hyderabad
It is prudent of you to start investing for your child's education so early. However, Rs 1,000 is not too much of an investment. As a first step, you need to assess the amount required and the investment horizon and then adjust for inflation to decide on the corpus required. Plan for 40-50% of the corpus coming from equity or related avenues.

As the time of your need nears, you would have to reduce equity exposure to 25%. Given the age of your child, you can supplement investments with a child plan, which will offer safe and guaranteed returns. Some child plans are designed such that they make payouts at relevant milestones.

Also, a few have the 'waiver of premium' benefit, which takes care of the child's needs even if the parent or guardian passes away. If this is not within your budget, then consider a term plan. If you also want to initiate an SIP into a mutual fund, we suggest a balanced fund.

Savings for retirement
I want to save for my 17-year-old son's education and my retirement. I am 58 and can invest Rs 5,000 per month. I know it's late but what are my best options? I have a SIP (Rs 3,000) in HDFC Top 200 since November 2010 and a Metlife Smart Plus scheme with an annual premium of Rs 25,000. I have paid three premiums. I am expected to get Rs 15 Lakh on retirement in December 2012. -L.R. Bhatia, New Delhi
Considering your son's age, we assume you'll need between Rs 3-8 lakh each for graduation and postgrad courses. We suggest you use a combination of equity and debt avenues. Considering your age, restrict your overall equity exposure to about 40%, reducing it to about 30% by retirement. Start another SIP (of Rs 3,000) in a balanced or low-risk equity fund and the balance (Rs 2,000) can be invested in a monthly income plan.

With a 12% rate of return, in 3 years, you will have Rs 3.45 lakh and in 5 years the corpus would have grown to Rs 6.54 lakh. In case you are still falling short, you can consider an educational loan; this would be tax efficient and your son can claim tax benefit on the interest paid when he starts earning. We also suggest you continue paying the Metlife Smart Plus premium till you retire as the plan is a whole life Ulip. You can make the plan work like an annuity by withdrawing nominal amounts on a yearly basis.

I have a monthly income of Rs 35,000. So far I have invested only in tax plans-Rs 35,000 in ICICI Tax Plan and Rs 10,000 each in SBI Magnum Tax Gain and Sundaram BNP Paribas Tax Plan. At the end of this month I will have Rs 1 lakh and would like to invest it in equities, with SIPs to follow. I have a surplus of about Rs 15,000 per month. I am single and do not have any dependents. How should I diversify my investments now? -Radha R, Chennai
You seem to be an investor with an appetite for high risk. However, we suggest you consider a healthier debt-equity mix to balance risk. As for the additional investments consider the following suggestions. First, plan for tax savings. Once that is done, go for a term cover of Rs 25 lakh (with an annual premium of Rs 10,000), medical cover for both you and parents of at least Rs 4-5 lakh each and infrastructure bonds.

This will leave you with Rs 50,000, which can be invested in a fund such as ICICI Pru Floating Rate Fund with an STP or systematic transfer (of Rs 2,000 every month into an equity fund over 25 months in this case). HDFC Top 200 is another option. You can also route some amount into an ELSS if you have not utilised the entire Rs 1 Lakh limit under section 80C.

As for the monthly surplus, intiate SIPs into diversified equity, balanced, low-risk equity and gold mutual funds. It would be best to restrict the number of funds to not more than four or five, keeping in mind the investible surplus, the kind of funds and your risk-return profile.

Insurance

I am 42-year-old non-smoker. My wife is a homemaker and we have a 10-year-old daughter. Presently, my employer provides me a health cover of Rs 4 lakh, which covers my family as well. I plan to enhance this cover and buy another personal health policy with a cover of around Rs 4 to 5 lakh. Should I go for a family floater plan or will an individual health policy suffice? Also, how beneficial will a critical illness rider be? I have accidental death insurance of Rs 18 lakh and life insurance of Rs 20 lakh. -Mahesh Jat, e-mail
At the outset, we appreciate that you have considered having personal health insurance. It is always advisable to have health cover over and above the one provided to you by your employer, given the frequency of job-change these days.

A family health insurance policy will remain with you regardless of change in job or location. In comparison to an individual health insurance policy, a family floater option extends cover for the entire family for the sum insured at a marginally incremental premium, which enables optimal utilisation of the insurance policy.

So, go for a family floater plan. Critical illness riders are available as add-ons to health insurance policies and these cover treatment for diseases such as cancer, kidney failure and heart attacks. These riders are subject to each insurer's policy and underwriting principles. However, before choosing an option, consider the sum insured options for the health plan as well as the riders, keeping in mind the age and the number Insurance of members in your family.

In my opinion you should look for a sum insured of about Rs 5 lakh. However, please note that every insurer is governed by their own underwriting policies. Approach your insurer and propose a cover suitable for you.

Realty worries
I have recently inherited a piece of land, measuring 3,600 sq ft, in Guwahati. Could you kindly suggest the best options to get a regular income from this land? -Basu Bhattacharya, Guwahati
There are limited regular income options from land. You may want to consider borrowing partially (you need to bring in about 20% as down payment) to build a house, which can then be rented out. The rental income can be used to pay your home loan EMI. The home loan is also tax efficient as you can claim tax benefit on both interest and principal.

Alternatively, you can consider leasing out the land for special events such as exhibitions, parking, school playground etc, but would only bring in limited income.

You also have the option of leasing out the land to third-party developers for a joint development idea that could be commercially viable. Of course, you could sell the property and invest in financial assets that provide a regular income. Consider all factors, including capital appreciation, risk appetite and investment needs before deciding.

I had purchased a unit-linked health plan from LIC (Health Plus) about a year ago. This plan is a blend of life risk coverage, investment and hospital and critical illness benefits. However, I later realised that the plan does not cover some of the minor surgeries that are usually covered under conventional health insurance policies. So, I had bought an additional health plan from Reliance General Insurance to fill the gaps. Now my new job also provides a health cover and I am in a dilemma whether to continue with all three plans which have overlapping benefits. Will it be useful to pay premiums (especially, the unit-linked plan with a comparatively higher premium) for multiple health insurance plans or should I surrender one of them? -Rupal Sharma, Mumbai
Life insurance companies often provide lump sum benefit plans, such as hospital daily cash or personal accident cover as riders. These may not be adequate while catering to a health care need of an individual. It is advisable to choose a health insurance plan from a health insurance provider that would cover hospitalisation or OPD expenses, as required.

It is also advisable to have your own health insurance cover, apart from the one offered by your employer. At the time of retirement or while shifting jobs, an individual should have his own health cover. Also it is important to remember that all individual policies include a certain waiting period and are subject to underwriting before they start covering all diseases. Hence it is advisable for all individuals in a group to choose a cover with adequate time in hand and remain hedged against financial risks owing to medical exigencies.

Taxation

I gifted Rs 2 lakh to my wife, with which she bought an agricultural plot within 8 km of the municipal border. Who will pay the capital gains tax on the sale of this land? -Santosh Kawde, Pune
Since your wife has acquired urban agricultural land out of the money gifted to her by you, any capital gain arising from the sale of such agricultural land shall be taxable in your hands due to the clubbing provision.

Tax saving
On 22 June 2011, I received a notice from the Income Tax department on Section 142(1). The ITO has asked me to appear before him with a list of documents. But I am not in India these days. How can I get a revised hearing date? -Sachin Guha, Mumbai
After receipt of any notice under Section 142(1), you need to appear before the assessing officer along with the documents on a specified date. Since you are not in India on that day, you can ask your assessing officer for an adjournment of the case until another hearing date can be set. But, when writing for a revised hearing date, you have to justify the reason for not being able to appear. In the letter you can also mention the date when you will be available.

My father's tax refund has not been credited in his account for 2008-9 and 2009-10. He passed away in February 2010. Can I claim his tax refund? -Sarabhjeet Singh, New Delhi

Yes, you can claim the tax that was to be refunded to your father and which was not credited to his account. A legal heir of the deceased can claim refund on his behalf by intimating the assessing officer regarding death of the concerned person.

Anil Rego, CEO, Right Horizons, has tackled financial planning issues; Antony Jacob, CEO, Apollo Munich has advised on health insurance and Taxspanner.com has answered tax queries. Log on to www.moneytoday.in to submit your questions.

Renu Karnad, MD, HDFC
Home Loan

I stay in a flat which is registered in my name. My wife too has a flat registered in her name. Since she has no source of income, I stand as guarantor and pay the EMIs on the loan. Can I claim tax exemption on the EMIs for both loans? -Vijay Raj, e-mail
No, unfortunately the law states that you cannot claim tax exemption for paying EMI's on a property that you do not own, either fully or partly. Hence, you cannot claim a tax benefit on the property owned by your wife even though you may have paid the EMI's on her behalf.

I am a 29-year-old unmarried BPO employee. As I work in a Noidabased company, I want to buy a Rs 15 lakh studio apartment there. I have Rs 10 lakh and will get the rest as a loan from my parents. However, my friends have suggested I buy a one bedroom apartment instead, which will cost Rs 30 lakh or more. Will I get a loan for the additional Rs 15 lakh needed? My take-home salary is around Rs 50,000 per month. -Dev Dasgupta, Mumbai
Based on the information that you have provided and with the assumption that your credit record is satisfactory (as assessed by the lender) and that you have no other loans outstanding, you should ideally be eligible for a loan of Rs 15 lakh. However, it is advisable to first apply for the loan before you make any commitment to buy. This is because one must keep in mind that the loan will be granted based on the lender's assessment of your repayment capacity and subject to the property being approved by the lender.

Renu Karnad is the Managing Director of Housing Development Finance Corporation. She will answer queries on home loans.

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