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Estate Planning in India: Will vs Trust

Did you know- Over 60% of civil cases in India are related to land/property disputes? Reason – lack of estate planning.

Estate planning is one of the crucial pillars of your financial plan. It sets your financial affairs in order, ensures tax efficiency, and offers financial security for your loved ones.

Yet, people often ignore or delay it. Many think estate planning is only for the rich when in fact, it is essential for everyone.

And if you think it’s a lengthy process- it would probably demand less of your time than planning for a vacation or deciding which movie to watch or where to eat.

So, dedicate some time to an estate plan if you don’t want your legacy to go to waste.

Your planning starts here! In this blog, we will shed light on what is estate planning and various methods in India to efficiently handover your legacy.

An estate plan is a process of distributing a person’s assets such as property, savings, and personal belongings among his/her legal heirs after the person’s incapacity or demise. It’s a legal procedure to ensure a fair legacy transfer to the successors.

1. Drafting a Will
2. Creating a Trust

We will discuss both methods in detail.

But before that…

If you don’t create an estate plan, your heirs will inherit your property based on the applicable succession law.

Each succession law has defined rules about your legal and alive heirs. While these laws are created to ensure the seamless transfer of your legacy, they may not align with your preferences.

Therefore, to ensure a proper legacy handover as per your wishes, you ought to talk to your financial advisor to create an estate plan.

If you don’t have a financial advisor, you can get in touch with VNN Wealth. Our experts are happy to assist you.

Estate and succession planning isn’t only about transferring your assets to your heirs. It also includes establishing guardianship for your children (minors or children with special needs), ensuring your spouse/dependents will continue to have financial support as per your wishes.

Family disagreements are bound to happen without a predefined estate plan. The legal challenges may lead to long court battles and broken families. With a well-crafted will, you can pass on your assets as per your wishes, avoiding family conflicts.

If you’ve accumulated substantial wealth over the years, you’ll have to consider tax liability. An estate plan can offer a tax-efficient approach to transferring your assets to your loved ones. Your wealth manager can assist you in minimizing your taxes.

There are thousands of crores of assets lying unclaimed in India due to heirs not being aware of it. An estate plan will not let your assets go to waste. Set clear instructions and ensure your wealth is preserved for your family’s financial well-being.

Creating a joint account with your heir while you are alive helps them understand and control your assets. The same joint account can be used to create FDs, invest in mutual funds, etc. After the demise of the primary account controlee, survivors will have to submit a death certificate to get complete control over the account.

People confuse nomination with inheritance as everyone often adds their legal heirs as nominees. The nominee is not necessarily a legal heir. The nominee is only responsible for ensuring that your assets reach your legal heirs. You can add nominations to all your assets and change them anytime. While you can add your legal heirs as your nominee, it is recommended to add a trustworthy nominee who can take care of the handover after you.

Power of Attorney, or POA, is a legal document that gives an agent aka attorney-in-fact the authority to act on your behalf. The attorney-in-fact can make decisions regarding your medical care, finances, property, etc. The POA plays an important role in case of your absence, unavailability, or incapacity.

When you buy term insurance, you aim to protect your wife and children financially. But, simply purchasing the insurance and adding nominees doesn’t guarantee financial security for your wife and children. The insurance payout could go to people you owe money to.

The solution is to purchase the term/life insurance under the MWP Act (1874). The MWP Act legally protects the insurance payout from any creditors or family members. It ensures the money goes to your wife/children. Even you, the policyholder, cannot cancel the policy without obtaining consent from the beneficiaries i.e. your wife/children. This method is ideal to protect your family especially if you have significant debt to repay.

A will is a legal document defining how you wish your property/assets to be distributed after your demise. It also includes clear instructions on guardianship of your children and financial security for your spouse.

You can also create a living will to outline your preferences for medical treatment in circumstances where you may not be able to convey your wishes. This includes decisions about treatments, life support, and critical care if required. A joint will is also an option where two people, usually married, create and sign a single will.

A will is created when you (the testator) are alive and can be changed any number of times. But it will only be disclosed after the testator’s demise.

Going through a probate process is mandatory for the execution of a will. It’s a court-supervised process to validate the will, settle debts, and distribute the remaining assets to the beneficiaries.

A trust is a legal arrangement in which you (the settlor) can transfer your assets to a trustee to manage those assets for the benefit of your beneficiaries. A trustee can be a person you have confidence in or an entity. Trusts are private, hence, the probate process is not required.

In India, settlors must register the trust deed under the Indian Trusts Act, 1882. It has clear instructions for the trustee to distribute the assets as per the settlor’s wish.

Appointing a trustworthy individual or an entity as your trustee is important. Their responsibilities must clearly be defined in a deed to avoid conflicts.

Public Trust: Created for a large group or general public. Eg: Charitable institutions, Non-profit NGOs.
Private Trust: Created for a closed group of beneficiaries such as families.
Living Trust: Created during the lifetime of a person.
Testamentary Trust: Indicates transfer of estate after the person’s demise.
Revocable Trust: Is changeable. It can be amended or terminated as per the settlor’s wishes during their lifespan.
Irrevocable Trust: Cannot be revoked after the person transfers his/her assets to the trustee.

The type of trust applicable to you depends upon your financial situation, the types and complexity of the assets.

Will vs Trust  Vnn Wealth

A will is ideal for people with a relatively simple estate who want to distribute their assets according to their wishes. It’s a good option if you don’t mind the probate process and are looking for a cost-effective way to financially protect your family.

A trust is better suited for people with complex and large estate. It’s ideal for those who want to provide for their family under specific conditions, take care of minor children or children with special needs, and keep their estate plan private. Trusts also offer protection from creditors and potential tax benefits.

Discussing your estate plan with your heirs depends on your family dynamics. It also depends on how complex your financial affairs are. Many individuals prefer to keep their estate plan private until the right time to disclose it.

Here are certain things you can do to ensure your heirs are ready to receive an inheritance:

Your children/heirs may use your inheritance irresponsibly if they’re not financially aware. To preserve your legacy and make it last long, teach your children about savings, taxes, investments, properties, etc. Financial literacy is important if your successors are going to receive significant wealth.

Communicate with your family to know their preferences and opinions. Share your goals and plans with them. Make sure you and your family are on the same page. It can help you create a better estate plan.

If you’re choosing one of your heirs as executor, trustee, nominee, or a power of attorney, you may want to discuss their responsibility with them. If you have minor children or a child with special needs, you can assign your family member as their guardian. Provide them with proper instructions. Train them if required and ensure they know their role.

Your estate plan may have fair but variable distribution among all your heirs. In such a case, family conflicts may arise. To ensure seamless execution of your estate plan, you can address and acknowledge sensitive issues. Make them understand your decision. Change your plan if their argument (if any) is valid.

Tip: Take your financial advisor’s and lawyer’s opinion.

Estate planning is an essential aspect of your financial planning to ensure the smooth transfer of your assets. Whether you opt for a will or a trust, it’s crucial to make informed decisions based on the complexity of your estate and your family’s needs.

If you don’t create an estate plan, your estate will be distributed as per the succession law applicable to you. The law does not take your wishes into account. Therefore, everyone should have an estate plan.

You can draft a will or create a trust as per your preferences, prepare your heirs to receive an inheritance, and have open communication with your family before making your decision.

For further assistance, get in touch with VNN Wealth. Our experts will assist you with a proper financial and estate plan. Book your appointment today!

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Blogs Mutual Funds

Top Mutual Funds to Invest in India in 2024

So many mutual funds to invest in India. So many opinions are rolling on the internet. Where to invest?

The decision is always confusing. There are more than four thousand mutual funds in India. Choosing the right funds demands plenty of considerations. It includes analyzing your existing portfolio and exploring the current economic growth.

The performance of mutual funds changes due to various factors. Investing in mutual funds based on their rating or past performance is not a smart decision.

Then what is?

That’s what we’ll discuss in this blog. Instead of choosing mutual funds to invest in 2024, we will talk about the categories of funds that’ll perform well in the coming years.

But before that, let’s understand the global economy

The global economy is facing an uncertain volatile time due to a combination of geopolitical conflicts. As the economy was recovering from the COVID-19 pandemic losses, the Russia-Ukrain war caused another disruption. It significantly impacted the supply of essential commodities like oil, gas, and agricultural products. Therefore, gas and oil prices have inflated in many countries, particularly in Europe as it depends on Russian energy sources. The war also caused fluctuations in steel, palladium, and aluminum markets, thereby increasing the cost.

Other geopolitical conflicts such as tensions between Iran and Israel, and instability in Bangladesh, are increasing global uncertainty. Moreover, China is also showing signs of a slowdown which could impact demand for raw materials thereby fluctuating the commodity prices. Weak GDP numbers have caused Chinese stocks to decline. China’s equity barometer, the Shanghai Composite fell 3.3% in Aug 2024.

Japan is facing a Yen carry trade issue as the Bank of Japan raised the interest rates from 0.10% to 0.25%.

One of the advanced economies, the USA, is also facing economic volatility due to the possibility of a recession, increased rate of unemployment, and disappointing corporate profits. The US equities declined sharply at the beginning of Aug’24, but the market recovered by the end of the month. The major indices of the US- S&P 500 and Nasdaq 100, rallied by 2.3% and 1.1% respectively.

All these geopolitical events are causing uncertainties in markets worldwide. Now let’s take a look at how Indian markets are performing amid these conflicts.

Fortunately, the Indian economy is booming. Industries like Pharma, Solar, and Tech, are significantly contributing to the economic growth.

Power demand is rising. Credit growth is expanding. Banking and Corporate sectors are rallying up. And not to mention, we have one of the best macros in the world.

Between Sept 2023 and Sept 2024, the Nifty 50 grew by approximately 26.49% and Sensex grew by 23.17%.

Around July and August 2024, the Yen carry trade issue and the US slowdown caused a slight decline in the equity markets. However, we’re currently in the liquidity bull run. Therefore, the impact wasn’t as significant as it would have been.

best mutual funds to invest in india

If you take a look at the charts above, the mid-cap and small cap valuations are expensive compared to large-cap at the moment. While mid-cap and small-cap are at their all-time high, the large-cap is still close to its three-year average level.

The long-term India Growth story remains intact. However, the global economic crisis is bound to have an impact on the Indian economy.

So then how do you ensure portfolio growth while dodging the market uncertainty?

The answer is- Asset Allocation!

Asset allocation refers to distributing your money across various asset classes such as equity, fixed income, gold, real estate, international equity, etc.

Asset allocation is crucial to avoid dependence on the single asset class. That way, when one asset class is going through a decline, the other asset class can maintain the balance of your portfolio.

Take a look at the table below. As you can see, asset classes are never in sync. For example, in 2020, gold performed better than equity and debt. However, in 2021, equity significantly outperformed gold.

equity, debt, gold investments

An ideal mix of all assets offers a perfectly balanced portfolio.

Now let’s move on to the mutual funds to invest in 2024 considering the market outlook. Your focus should be on the asset allocation. Below are some of the fund categories that can strengthen your portfolio amid global economic changes.

These are hybrid funds with a mix of equity and debt. Balanced Advantage Funds invest 65-80% of total assets into equity and 35-20% in debt.

Fund houses use valuation metrics such as the Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios of indices like the Nifty or Sensex to strategically adjust equity/debt exposure. For example, increasing the equity exposure when the market corrects to capitalize on the discount. Or increasing the debt exposure by selling equity when markets are overvalued.

Considering the current market scenario, BAFs are ideal for balancing equity and debt exposure. Instead of deciding the allocation by yourself, you can invest in BAFs and let the fund manager handle it for you.

The risk-return ratio on these funds varies based on allocation. Some BAFs are aggressive with the majority of the allocation to equity. Whereas conservative BAFs provide a debt-fund-like experience with some exposure to equity for growth. Choose the fund that fits your preference.

Some of the BAFs that you can look at are:

1. ICICI Prudential Balanced Advantage Fund
2. Kotak Balanced Advantage Fund
3. Quant Dynamic Asset Allocation Fund
4. SBI Balanced Advantage Fund

BAFs are ideal for investors seeking equity growth with lower risk. Fund houses leverage the equity market movement to generate superior returns. The debt component balanced the volatility and reduced the risk.

Multi asset funds are also hybrid funds with exposure to equity, debt, and gold. These funds offer instant diversification across three different asset classes.

These funds offer at least 10% exposure to each asset class. Most multi asset funds are equity-oriented with at least 65% exposure to equity to make them tax-efficient and the remaining exposure to debt and gold.

While equity will contribute towards the growth of this category, gold is playing its role better than ever. This year (YTD2024), gold has surpassed the Sensex by delivering 16% year-to-date returns. If the global economic conditions continue to fluctuate, gold will emerge as a safety net. Therefore, having exposure to gold is beneficial for your portfolio’s overall growth.

Multi asset funds have become investors’ preferred choice. These funds efficiently navigate market volatility by diversification. Ever since the debt fund taxation changed, these funds have gained more popularity. The AUM for multi asset funds has nearly doubled between March 23 to March 24. You can invest in debt with equity taxation, making these funds more attractive.

Multi asset funds are ideal for investors with conservative to moderate risk appetite.

Here are some of the MAFs you can consider:

1. ICICI Prudential Multi Asset Fund
2. Kotak Multi Asset Fund
3. Quant Multi Asset Fund

Flexi cap funds provide flexible asset allocation across the market capitalization and sectors/themes. Currently, small-cap and mid-cap segments are expensive whereas large-cap is fairly valued as shown above in the Indian market outlook. Instead of wondering where to invest, flexi cap offers a healthy blend of all three categories.

Unlike multi-cap funds, flexi cap funds have no restrictions on market cap. Fund houses use various value-based, risk-adjusted strategies to shift allocation across the market cap. These strategies jump on the market opportunities to maximize returns.

The risk factor for these funds may vary based on the exposure across the market cap. Do check the current allocation of the fund before investing to see if it matches your risk appetite.

These funds are ideal for moderate investors to build wealth over a long horizon.

Here are some of the flexi cap funds to explore:

1. HDFC Flexi Cap Fund
2. Quant Flexi Cap Fund
3. Motilal Oswal Flexi Cap Fund
4. JM Flexi Cap Fund

Over the last three years, large cap segment has been appropriately valued. The category has been lingering around the three-year average return level. In the coming years, fresh inflows from FIIs and DIIs are most likely to chase large cap category because of its relatively fair valuation.

Small and mid cap funds, being aggressive, are ideal for 7+ years of investment horizon. Whereas large-cap can cater to your 5-year financial goals. Large-cap funds are suitable to balance the volatility of small or mid cap funds in your portfolio. These funds are specifically suitable for new investors wanting to explore equity market. Start with large-cap then gradually explore small and mid cap funds.

Here are some of the large cap funds to view:

1. Nippon India Large Cap Fund
2. Quant Large Cap Fund
3. ICICI Prudential Bluechip Fund
4. HDFC Top 100 Fund

While the market outlook is important to craft your portfolio, there are various other factors to consider.

Setting clear goals and desired timelines helps optimize your portfolio. For example, if you’re planning to invest for a longer horizon, maybe to buy a home, you can invest in the aggressive scheme. Because risk is more associated with time than the scheme itself. Time mitigates risk.

On the contrary, if you’re planning for a short-term goal, for example buying a car, opt for safer funds. Debt funds or hybrid funds are ideal in such scenarios.

Allocate funds to your goals. That way, you’re not bothered by the market movements. All you have to do is stick to your investment strategy and time horizon.

Your financial advisor can help you create a strategy as per your goals. If you don’t have an advisor, you can book an appointment with experts at VNN Wealth to build your portfolio.

Take a risk profiling quiz to analyze how much risk you are comfortable in taking. The quiz will evaluate your financial as well as behavioral aspects to determine the suitable asset mix.

Your risk profile is a crucial factor in determining ideal mutual funds for you. If you’re an aggressive investor, you can explore aggressive categories. Otherwise, a balanced asset allocation is a way to go.

All the categories we mentioned above are suitable for both new and experienced investors. However, an experienced investor must review their existing portfolio to ensure true diversification.

A portfolio review will not only identify a gap in your portfolio but also avoid redundancy. Evaluate your investments with respect to your current financial situation and your goals. Our experts will also help you with the tax-efficient exit strategy to realign your portfolio.

Investing in mutual funds needs a strategic approach. You have to consider both the economic conditions and your financial goals. With the global economy facing uncertainties due to geopolitical tensions and market volatility, an optimized asset allocation strategy can offer stability and growth.

Currently, the best mutual funds to invest in India are Balanced Advantage Funds, Multi Asset Funds, Flexi Cap Funds, and Large Cap Funds. These funds help mitigate risks and capitalize on market opportunities.

While choosing the funds to invest, don’t chase past performance. The market may or may not replicate past success as the economy keeps changing, sectors are cyclical in nature and keep moving up and down. What may have worked for one fund in the past may not necessarily work in the future. Read the mutual fund factsheet instead to understand the allocation, rebalancing model, risk factor, etc.

Aligning your investments with your risk appetite, financial goals, and time horizon. Focus on diversifying your portfolio to navigate the changing economic landscape. Talk to an expert to further strengthen your portfolio and ensure long-term growth. Get your portfolio reviewed by our experts to receive personalized investment opportunities.

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Blogs Personal Finance

How to Ensure You Never Run Out Of Money After Retirement

Retirement is the golden era of your life. You finally relax. Sit back in your rocking chair with a cup of tea. You have time for your family and most importantly, for yourself. 

However, the ride through the retirement years will only be smooth if you plan for it beforehand.

Currently in India-

Only 10% of the 60+ population is earning from the pension or the rent.

About 60% of men and 25% of women above 60 are still working.

And 60% of the people above the age of 70 are dependants.  

Planning for retirement is one of the crucial pillars of your financial journey. You spend years working hard and building wealth. That wealth should keep you afloat for the rest of your life.

So here’s how to ensure you never run out of your retirement corpus. While this blog is designed for someone nearing retirement, young investors can also learn and plan beforehand.

Let’s take an example- When you visit a retail store to buy a TV, you likely have certain specifications in mind. You tell the salesperson those specifications, and they suggest options that meet your needs. But, if you’re unsure about what you’re looking for, the salesperson might try to sell you a TV on which he earns more commission.

Similarly, if you don’t know what you want for your retirement, you won’t be able to create a proper plan. Your bank RM might push a ULIP or some insurance plan that sounds good but may or may not align with your financial needs.

Therefore, it is crucial to know what you want. And how do you do that? Read along to find out everything you need to know about retirement planning.

How do you want to spend your retirement? Maybe in a cozy cottage away from city life. Or annual international trips with your spouse. Everything is possible by aligning your portfolio to fulfill your goals. 

But the primary step is to set a goal for your income expectations. There are multiple ways to draw a consistent income after retirement. 

1. Rental income from your residential/commercial property.

2. Monthly withdrawals via systematic withdrawal plan (SWP) from your mutual funds.

3. Annuities

If you’re salaried, you might also receive a corpus built in your PF after retirement. You can strategically invest it to draw monthly income. Talk about your goals to your financial advisor. Discuss the required corpus to live a life you want to live.

Note: Explore the comparison between rental income and a systematic withdrawal plan to generate monthly income after retirement. 

At what age you’d want to retire? What would be the timeline for your goals set for post-retirement life? Give it all a thought. Talk to your spouse and children to accommodate them into your goals. That way, you can choose the investment instruments catering to specific objectives. 

Here are the mutual fund categories that you can choose based on the horizon:

Time HorizonFund Category
0-3 YearsDebt fund/hybrid fund
3 to 5 YearsLarge Cap Funds
5 to 7 YearsMid Cap Funds
7+ YearsSmall Cap Funds 

Your overall risk profile is an important factor in retirement planning. It involves analyzing your financial situation to decide how much risk you can take. 

Nine out of ten times, people ignore their risk appetite. They just invest, only to find out the returns on their portfolio do not live up to their expectations. Either the portfolio is delivering low returns when a person can take higher risk. Or the portfolio is full of aggressive investments when a person has a low to moderate risk appetite.

Don’t let that happen to you. Take a risk profiling quiz to know where you stand. Answer honestly to receive insights on the asset mix that fits your profile. 

Your financial goals and risk appetite constantly keep evolving. Your initial investment strategy will not work for your retirement plan. Now you need a completely different strategy, which can be built against your existing portfolio.

Review your existing investment with a financial advisor. They’ll identify the gaps in your portfolio and realign it with suitable asset allocation. 

This step is not mandatory, but it’s always good to be aware. 

The market moves in a similar direction as the economy in the long run, with occasional fluctuations. So if you’re paying attention to the news about the global economy and its impact on Indian markets, you can easily form an opinion. The market awareness, at least to some extent, will help you choose the right instruments. It’ll also help you better understand your financial advisor’s suggestions to make an informed decision.

Here’s an example of how having a market opinion can help you choose the right funds:

When the markets are uncertain, your focus should be on asset allocation. You can invest in hybrid funds such as Balanced Advantage Funds, Flexi Cap Funds, or Multi Asset Funds for diversification.

Each fund has a different asset allocation and a cash component to rebalance the allocation based on market scenarios. Fund houses use an inbuilt model based on various parameters for rebalancing. 

1. If you think the markets are expensive at the moment and may decline: Choose balanced advantage funds with more cash holdings as these funds can buy more equity when the market declines. 

2. If you think the markets will rally further, choose balanced advantage funds with more equity holding to capitalize on growth.

3. If you don’t have any opinion, choose multi-asset funds to get instant diversification across equity, debt, and gold.

Similarly, a market outlook across small-cap, mid-cap, and large-cap will help you decide which flexi-cap fund to invest in. Flexi cap funds offer allocation across market cap based on the market conditions. 

Emergencies never announce themselves. A sudden expense may dent your financial plan. It’s always better to be prepared for such scenarios. Build a highly liquid emergency fund that you can withdraw whenever needed.

Make sure you have enough saved up to cover 6-12 months of your expenses. Instead of keeping these funds in your savings account, park them in liquid funds. Liquid funds offer a 1-2% extra interest rate compared to the savings account. 

Buy a health insurance plan for yourself and your family. It’ll take care of your medical emergencies without draining your savings. 

Inflation is inevitable. Today’s INR 50,000 monthly expense would be INR 1,60,000 after 20 years with a 6% inflation rate. You will need more money to continue or upgrade your lifestyle after retirement. You can’t avoid inflation but you can certainly surpass it by optimizing your portfolio. 

While planning retirement, keep your short, medium, and long-term goals in mind. Goals are essentially your expenses. Let’s say your monthly expenses after retirement are INR 2,00,000. To plan expenses for the next 3 years, you’ll need INR 7,200,000 kept in liquid assets for easy withdrawals. The rest of your retirement corpus can be invested as per your expenses in the next 5 to 6 years or even longer as per your financial plan. 

Transferring legacy to successors is still quite common in India. If you are planning to hand over your assets to your children, you may want to plan your finances accordingly. Consider your monthly expenses and the cash flow to have a comfortable life for yourself. What’s left after that can be invested in various assets for your children to inherit later.  

In order to seamlessly transfer your legacy, you must create an estate plan. Drafting a will or creating a trust avoids family disputes. It ensures the transfer of your assets as per your wishes, thereby financially securing your loved ones.

Last but not least, the taxes. You have to pay tax on gains and income generated through your investments. Similar to inflation, taxes are unavoidable. However, you can dodge some taxes by optimizing a tax-efficient exit strategy. Your financial advisor will assist you with an exit strategy that ensures better post-tax returns on your portfolio. 

If you don’t have a financial advisor, get in touch with VNN Wealth. Our experts will help you plan for your retirement. 

Now that we’ve covered all the basics, let’s discuss the most commonly followed retirement planning strategy.

This is the most commonly followed strategy to manage your retirement corpus. The 3 buckets represent your financial needs for a particular period. Together, these buckets keep your funds moving, thereby offering you financial freedom.

retirement planning strategy vnn wealth

The 1st bucket, AKA Safety Bucket, contains highly liquid assets to cover living expenses for up to 3 years. 

Let’s assume for the sake of example that your monthly expense after retirement would be INR 2,00,000. In that case, you can fill bucket 1 with INR 7,200,000 to comfortably cover 3 years of expenses.

Those INR 7,200,000 can be invested in high-liquidity instruments. 

1. The most common liquid and safe instruments are Fixed Deposits, Certificates of Deposits, or Liquid Funds. 

2. Money Market mutual funds can also be included in this bucket. These funds invest in highly liquid assets.

3. While many prefer keeping funds in savings accounts for emergencies, you can also consider short-term debt funds.

Debt funds offer liquidity, better yield than savings accounts, and are available in variable time horizons. 

debt funds yield
As of May 2024

This bucket offers financial safety even during market downturns and avoids the need to sell long-term investments.

Bucket 2 is a Stability Bucket for medium-term goals. The assets in this bucket cater to 3 to 5 years of financial needs. 

While you are emptying the 1st bucket, investments in bucket 2 can generate interest to refill the 1st bucket. 

1. Fill the second bucket with Corporate Fixed Deposits, Hybrid Mutual Funds, and Senior Citizen Saving Funds.

2. Corporate FDs are slightly riskier than bank FDs but offer superior interest rates. That extra 1 to 2% can make a huge difference.

3. Hybrid Mutual Funds invest in equity, debt, and gold. For example- Balanced Advantage Funds, Multi Asset Funds. These funds are less riskier than pure equity funds and are suitable for intermediate financial goals. 

4. Senior Citizen Savings Scheme can also be a part of a medium-term financial plan. Retirees can invest INR 1,50,000 in a financial year to get an exemption on tax under section 80C of the IT Act. 

The second bucket aims towards income production and stability with less volatile investments. 

Bucket 3 is the growth bucket for wealth creation. While the first two buckets are taking care of your expenses, the 3rd bucket can keep generating more wealth. You can keep it untouched, or use the gains/capital to refill the previous two buckets. 

1. The best instruments to fill this bucket with are equity mutual funds, direct equity, and alternative investment funds (AIF). These instruments are capable of delivering superior returns in a longer horizon. 

2. You can opt for a professional Portfolio Management Service (PMS) for a custom long-term financial plan.

Diving your retirement corpus into 3 buckets depends on your overall portfolio, expenses, goals, preferred investment horizon, and the income you want to generate post-retirement.

There’s no one-formula-fits-all. It’ll change as per your financial requirements and goals. The idea is to keep the cash flowing through the buckets. 

If you want to manage your retirement corpus, experts at VNN Wealth will help you create a personalized 3-bucket strategy. Get your portfolio reviewed by our experts and optimize your portfolio to plan for a stress-free retirement.

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Blogs Personal Finance

Real Estate Vs Mutual Funds: What is Better for Monthly Income?

Picture this: You’re sipping a warm cup of coffee with your loved ones, knowing that a steady stream of income is flowing into your bank account. Even better if you don’t have to work for it.

This vision of financial independence is achievable through smart investments. You can generate a steady stream of income for your retirement or simply have passive income for your family.

Two of the popular options investors explore to generate regular income are:

1. Real estate investments for rental income
2. Income from mutual funds via systematic withdrawal plan (SWP)

In this blog, we will discuss both these options in more detail, exploring how they work, how much initial investment is required, and what their advantages and drawbacks are.

Real estate investment involves purchasing a residential or commercial property. As it’s a tangible asset, you own it in a physical form.

In order to generate consistent income from it, you ideally have to rent out your property with a long-term lease agreement.

The rental income depends upon many factors such as rental yield in the area, property’s condition, and market demand.

Mutual funds are a collection of stocks, bonds, gold, and international equity. You can invest in mutual funds that align with your risk appetite and financial goals.

The ideal way to generate income from mutual funds is to invest for a long horizon, let the money compound, and then start a systematic withdrawal plan. A Systematic Withdrawal Plan (SWP) allows you to set an amount and frequency at which you’d like to receive income. The fund units worth the amount you’ve chosen will be sold and the amount will be transferred to your savings account.

Now, we will compare real estate vs mutual funds for monthly income against various parameters.

Let’s take an example: Vikas wants to generate INR. 50,000 monthly income. He’s exploring both the options- rental income and SWP. Let’s help him figure out what makes more sense…

Real Estate

Your initial investment will vary based on the location, type of real estate property, size, amenities, etc. The rental income depends upon the rental yield in the area. In India, the residential rental yield ranges from 2 to 4%. Here’s a snapshot of the rental yield in different cities in India.

CityRental Yield
Delhi NCR2.79%
Bangalore3.45%
Mumbai2.44%
Ahmedabad3.22%
Chennai3.10%
Hyderabad3.16%
Pune3.09%
Kolkata3.96%

Let’s take 3% for the sake of understanding.

For Vikas to generate an income of INR 50,000 from residential real estate, he’ll have to purchase a house worth 2 crores.

Property value = Annual rental income (50000 x 12) / rental yield (0.03- converted into decimal) = 600000/0.03= 2 crores

Now let’s say Vikas pays a 20% downpayment, which is 40 lakhs, he’ll have to take a home loan for the remaining amount i.e. 1.6 crores.

With an 8% home loan rate and 20 years of tenure, his EMI becomes 1,33,830. Even if he generates a rental income of INR 50,000, he will still have an expense of INR. 83,830.

On top of that, Vikas will have to pay the cost of home ownership. Brokerage (1-2% of the total value), stamp duty (4-7%), registration fee (1%), parking space (~10k/month), maintenance charges (varies as per location and amenities), etc.

Mutual Funds

On the flip side, Vikas will only have to invest 50 lakhs in mutual funds to generate INR. 50,000 monthly income.

Mutual funds deliver superior returns compared to real estate. For the sake of calculations, it’s better to be conservative. So we’ll take 12% p.a. as the average return on your mutual fund investment over a longer horizon.

Investment amount = Annual income (50,000 x 12= 6 lakhs) / 0.12= 50 lakhs

The same income can be drawn from mutual funds via SWP by investing only 50 lakhs instead of 2 crores. Plus, while you withdraw monthly 50K, your remaining amount keeps compounding, so you can keep withdrawing 50K/month for the next 20 years, at least.

With mutual funds, Vikas has an option to invest a small amount via SIP to gradually build his wealth.

Monthly SIP AmountAverage Return p.a.Investment HorizonWealth Accumulated
20,00012%20 years1,99,82,958
Total Wealth Accumulated in Mutual FundsAverage Return p.a.Monthly Regular Income via SWPYears of Regular Income
1,99,82,95812%1,00,00020

This example is only for the sake of understanding. Parameters like initial investment amount, investment horizon, and average rate of return may change the calculations.

Real Estate

Real estate investment is usually less risky than mutual funds. Market fluctuations have little impact on real estate. However, you may also face a risk of vacancy, tenant default, holdover tenancy, legal disputes, maintenance issues, etc. Additionally, there’s a chance of depreciation in property value during the economic slowdown.

Real estate delivers potential returns from rental income and property value appreciation. You can expect about 8% to 10% p.a. average return on real estate investment in 10 years. It varies depending on the city, property conditions, economic conditions, etc.

Mutual Funds

Mutual funds have a certain risk associated with them based on the category and market movements. You can invest in mutual funds based on your risk appetite and financial objectives. Take our risk profiling quiz to understand the equity and debt exposure suitable for you.


The return on your mutual fund portfolio depends upon the type of scheme, investment horizon, market conditions, etc. Mutual funds deliver superior returns in a longer horizon despite market volatility. You can expect 12% p.a. average returns in 10 years. You can even generate 2% to 5% returns over and above average if you periodically review your portfolio and optimize it to generate benchmark-beating returns.

India Residex House Index - Real Estate Vs Mutual Funds
Real Estate Vs Mutual Funds

Residex has grown by 47.4% between 2014 to 2024, whereas Nifty has grown by 301.2%. Evidently, you’ll make better returns from mutual funds compared to real estate.

Real Estate

Real estate investments are less liquid compared to mutual funds. The property sale takes a lot of time. You’ll have to go through the hassle of property transfer paperwork and the cost associated with it. Plus, you may not get the price that you’re looking for. It’s not as easy as redeeming mutual fund units. You have to go out, sit through the negotiations, and handle the transactions.

Additionally, you have to spend a lot of time finding a good property. It requires evaluating the location in person before making a decision. It’s not easily accessible. So if you ever need funds for an emergency, real estate is not reliable.

Mutual Funds

Mutual funds are highly liquid and accessible online. You can invest and withdraw anytime you want. There’s no lock-in period except for ELSS mutual funds which carry a 3-year lock-in period for the purpose of tax-saving.

Otherwise, you have all the freedom and flexibility to decide the time and amount of investment/withdrawal. When you plan to start an SWP to withdraw income from mutual funds, you can automate the withdrawal amount, frequency, and date. The funds will start flowing into your bank account as per your preferences.

Plus, partial withdrawal is possible in the case of mutual funds which is not an option in real estate. In case of emergencies, you can sell some units of mutual funds, whereas, you cannot sell half your house.

Real Estate

Managing and maintaining real estate property requires a lot of your attention. It’s a never-ending loop of ensuring the property is clean and functional. Following up with tenants and making sure they’re following society’s regulations. In some cases, tenants may not leave the property, causing a dispute. Be it residential or commercial, real estate investments demand your time and attention at all times.

Mutual Funds

Apart from periodic monitoring, you don’t have to look into managing your funds. Mutual fund houses have dedicated fund managers who are experts in handling all the transactions. Fund managers make decisions on the stocks to include in a scheme to leverage market opportunities. All you have to do is invest and let your money compound over the years. Once you achieve your financial goal, you can start/stop SWP anytime as per your income requirements.

The inflation rate in India is around 6 to 7%. The rate of inflation affects your effective return on investment.

Considering the above data:

Avg Return p.a.InflationEffective Return
Real Estate8 to 10%6%2 to 4%
Mutual Funds12 to 15%6%6 to 9%

In the case of rental income, you can increase the rent by 5 to 8% every year. However, your post-tax returns taking inflation into account cannot beat mutual funds. Mutual funds have the potential to deliver benchmark-beating, inflation-beating returns.

Here are some examples of funds from three different categories outperforming the index:

Fund NAVIndex Closing Value
10 Jan 201412.226278.90
12 Jan 2024141.1320906.40
Growth1055.4%232.9%
CAGR28.4%12.8%
Nippon India Small Cap Fund
Fund NAVIndex Closing Value
15 Jan 201420.526171.25
15 Jan 202498.8321508.85
Growth381.7%248.4%
CAGR17.2%13.2%
ICICI Prudential Bluechip Fund

Fund NAVIndex Closing Value
16 Jan 201420.056241.85
15 Jan 2024117.5521441.35
Growth486.4%243.5%
CAGR19.4%13.0%
Quant Multi Asset Fund

As you can see, these funds have beat their respective benchmark. The chances of earning more than the average returns are possible with mutual funds.

Real Estate

1. Rental income is taxed as per the investor’s tax slab.

2. If you sell your property after 24 months, you will have to pay long-term capital gain tax. As per budget 2024, you can either opt for old taxation or new taxation, whichever attracts lower tax for you. As per the old tax rule, the long-term capital gains will attract a 20% tax with an indexation benefit. The new tax rule does not offer an indexation tax rule but the long-term gains will be taxed at 12.5%. You can get an exemption on capital gain tax by investing in 54EC bonds within 6 months of property sale/transfer.

3. You can claim an exemption on interest paid on a home loan up to a maximum of 2 lakhs under section 24. In the case of a let-out property, you can claim an exemption against the entire interest paid.

Mutual Funds

For equity-oriented mutual funds:
Short term capital gain tax of 20% will be applicable on funds withdrawn within 12 months of investment.
Long-term capital gain tax of 12.5% above 1.25 lakhs will be applicable on funds withdrawn after 12 months.

For debt-oriented funds
Both short and long-term capital gains will be taxed as per the investor’s tax slab.
You can claim exemption against ELSS mutual fund investment of up to 1.5 lakhs under section 80C of the IT Act.

Real EstateMutual Funds
Asset typeTangible. Physical property.Intangible. Units of mutual funds that are a combination of stocks and bonds.
Initial Investment AmountHigherLower
Return on InvestmentRental income, price appreciation
Average 8 to 10% p.a.
Capital gains and dividends.
Average 12 to 15% p.a.
LiquidityLowHigh
RiskMarket slowdown, tenant default, legal disputes, maintenance, vacancy issues, etc.Market performance
Management and MaintainanceHigh and costlyProfessional management by fund houses. Low maintenance.

Real estate has always been a popular investment option in India. Even today if you ask your parents or grandparents, they’ll advise you to invest in real estate. Their advice comes from an era when mutual funds weren’t regulated. The UTI mastershare fraud had broken people’s trust in mutual funds. Therefore, they preferred physical assets such as gold, real estate, cash savings, etc. Plus there’s a sentimental value attached to buying a property, mostly because it seems safer. You own a tangible property and control everything around it. And sure, if you’re insistent on buying a home to secure your family’s future, to have a place to call your own, you can definitely consider buying one.

But for the sake of generating income, mutual funds are better suited. Now SEBI regulates mutual funds to ensure investors’ money is safeguarded. You can invest as per your risk appetite, decide the amount and frequency, and let the fund managers handle the fund’s growth while your money compounds.

The clear winner here is the systematic withdrawal plan.

Investors often consider purchasing property to generate passive income without assessing their overall portfolio. However, mutual funds are clearly more feasible to generate regular income. The initial capital required to invest in mutual funds is significantly lower than in real estate. Plus, the cost of home ownership, the time and energy required to maintain the property, the slow growth, and low liquidity make real estate less appealing.

Mutual funds are highly liquid. You can start investing a small amount by SIP and accumulate wealth over the years. When you’re ready to withdraw income, you can easily set up an SWP online. Unlike real estate, mutual funds have the potential to deliver benchmark-beating, inflation-beating returns if you truly diversify your portfolio and periodically optimize it.

Take a risk profiling quiz and review your portfolio today. Learn more about the Systematic withdrawal plan from our experts and revamp your portfolio to generate monthly income.

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