Today I am going to discuss two main approaches used by wealthy families in India:
- FD + SIP Method
- Lumpsum Method
The FD + SIP Method
It is the ultra conservative method.
Generally, large joint families where there are more than 10 to 15 people use this method as this is suitable for them on a taxation perspective.
What they do is:
Make FD of all their incomes.
5 lakh Rupees FD at Each Bank under the name of Each Person.
Why 5 lakhs?
Two Reasons:
- Every Bank is insured upto 5 lakhs by the DICGC in India.
- Interest Income Per Bank Per Person is less than 50,000/- per year which allows each person to escape the 10% TDS Tax that is levied on Interest Payout.
This is completely Risk Free and Tax Drag Free method of investing large amounts of money assuming you have very large family (you need to maximize the number of people).
Now, you select the option of Monthly Interest Payout with these FDs.
And then you match your SIP dates with these Interest Payout Dates.
This way, you don’t take the risk of timing the market.
You will not benefit from the bottom nor will you be hurt by investing all the money at the top.
And if you do understand when the market bottoms, you can break any number of FDs to invest in the market.
The Lumpsum Method.
The Lumpsum method is much simple.
You Just Choose a fund and Invest the whole amount in the Fund irrespective of the market cycle or current level of valuations.
The risk associated with this type of investing is that you might end up entering at the peak of a bull run and might not see any returns for next 3-5 years.
Additionally, based on the type of fund you choose, you might end up entering in the most overvalued segment of the market during the peak, which means there is a risk of loss of capital during the next 3-5 years before the economy starts warming up again or the next bull run starts.
But if you try to do the FD+SIP Method with a small family (or less than 10 people), you will have to face the following problems:
- TDS Drag = 10% TDS on Interest Income.
- Taxable Income Limit = 12 lakhs per person. (assumes no other income)