How to Invest Surplus Funds? | Portfolio Management | Personal Finance

[00:00:00] Sometimes life gives you good surprises and unfortunately we aren't equipped to manage or handle that kind of surprise. And in finance, windfall gains are something like that. Nobody tells us how to manage those many surplus funds. So in this video I will be trying to give some knowledge, some tips and a basic framework of how to manage surplus funds.

[00:00:26] Welcome to this brand new episode. I am Swapnil Karkare, Chartered Accountant and an Economist. And we are going to talk about Personal Finance in today's episode. What are surplus funds? Where to invest surplus funds? See everyone wants to enjoy their lives, want to spend money on different things they want and they like and they aspire to. But they have to be spent wisely.

[00:00:52] And spending wisely can come only if we invest wisely. Therefore, it is important to have a structure, a framework. So let's get started. Press the like button, share this video and subscribe to the channel. Your one action can trigger the algorithm and will help in making this video reachable to everyone. Thank you. Now back to the episode.

[00:01:19] There are three kinds of surplus funds. First, coming out of regular sources. One where you either get more monthly income or have lesser expenses in that particular month. For example, your usual monthly income is say 100 rupees, you spend 60 rupees and you invest 40 rupees.

[00:01:38] But there are some months where you earn 110 rupees or spend 50 rupees. That means your savings are now increased from 40 to 50. It happens, right? A lot of times. Maybe in some months there are lesser tax deductions. In some months there are bonuses or some kind of basic increment or some kind of gift or something.

[00:02:03] So that's first kind of fund which we are going to talk about. Then there is second type of surplus fund where you get a very high amount of funds or cash inflow in a particular month. Let's say your FD gets mature. Now what to do with it? You might decide to renew it. But yes, we have that is again a cash flow.

[00:02:24] And that is one strategy of renewing that fixed deposit. Then there is third type of surplus funds which involves very, very, very, very, very high cash inflow. Let's say you sold your property or you get some retirement funds. All those things come under this category. So first category, the amount is low. Say in second category, the amount is slightly higher or I would say medium.

[00:02:49] And in the last category, it's very high amount. We are going to deal with different kinds of surplus funds because it's not the case that you only have surplus funds when you sell the property. Right. Because there are many instances in life where you are managing funds higher than what you are usually managing.

[00:03:10] So that kind of changes the psyche, the outlook towards how to manage funds. Sometimes you get afraid of because you haven't seen so much funds at one particular point in time. So you might get stressed out or freaked out or it might sound very weird that, OK, how to manage, say, 50 lakh rupees at one time. So managing 50,000 surplus and managing 50 lakh surplus involves different strategies and different mindset also.

[00:03:37] Now, let us understand this division in a better way. But before that, there are some disclaimers, assumptions which I have used in this particular video or in this particular framework, which I would like to discuss. First, I am not a semi-registered advisor, but I'm a chartered accountant and economist. Second, the attempt in this video is to give a framework to how to think about surplus funds.

[00:04:01] It is not an investment advice. Consulting a financial advisor is important and core step if you are dealing with large funds. In general, also, it is useful. But if you are having a large cash inflow, it is very important to consult a financial advisor to get a better knowledge of how to manage it. So do not take decisions based on this video. Here, I'm not going to tell you that, hey, why are you still investing in FX deposits?

[00:04:29] It's time of stock markets. I feel that every person is different. The psychology is different. The risk taking appetite is different. And yes, obviously, I will not say that, OK, you have to probably invest 100 percent in FD. You can try out. But if your psyche says that, no, no, no, I am very risk averse. I don't want to take any risk, any chance in life. I will invest in fixed deposit only. So that is your call. And I respect that in this framework.

[00:04:57] I am not going to tell you to change your portfolio allocations too much. If you are comfortable in investing in fixed deposit, please continue to do it. It's important to invest. That is the first step. Then first message will be do what you are currently doing. Then comes the exploration part where if you have not touched a particular type of asset class, then you might want to invest in. You can try doing that. But while trying out, do not exceed by 1% of your portfolio.

[00:05:27] Say if you invest in debt, let's say fixed deposit and cities, etc. So up to a particular point, do it happily. Then you can think of investing 1% of the portfolio in equities or mutual funds. Then comes the next part. OK, what kind of equities? What kind of mutual funds? All these things. And if you have already been investing in stock markets, then there is another experimentation part. Have you invested in international stock?

[00:05:56] Have you invested in different asset classes? So that kind of experimentation portfolio should also initially be limited to 1% of your portfolio. But I will never recommend investing in Bitcoins or cryptocurrencies and any unregulated asset class. Then in this framework, I don't want you to become stingy and only focus on investing. No. If your fixed deposit is matured and you want to spend it, do it.

[00:06:25] If you have kept it for buying an iPhone or taking a vacation abroad, then do that first. And then think about investing. Because spending is also important. It's not like, OK, only we have to invest. Obviously, investing is paramount, but not at a cost of, you know, living a miserable life. You have to enjoy your life. Any kind of cash inflow, which we are going to discuss in this episode, will be on a net basis and not on gross basis.

[00:06:53] For example, your fixed deposit of four lakhs is matured and you have kept one lakh rupees for some kind of spending. And that is already planned or that is already something which you have in mind previously. So the net surplus funds is three lakh rupees. That is what we are going to talk about. The, those three lakh rupees, how to invest. That is the framework all about.

[00:07:17] Similarly, if you have any outstanding loans or credit card bills or any other commitment, then do that first. Repay your loan. If there are surplus funds and if you can repay your, some amount of your loan. Doing that first is more important than investing in that particular point. So clear of your dues. Another important point is that if you are still into the old tax regime and have ATC deductions

[00:07:46] or any other deductions which you want to claim, I think investing in those items first is important because obviously you want to save your tax. So that kind of priorities should come first. So, spending, taxation and any other outstanding dues. Clear that first and then we are going to talk about the surplus funds.

[00:08:10] The goal here is to understand when and where to experiment with your portfolio and how to experiment. Here experiment is basically investing in such asset classes when you haven't invested before. The basic assumption goes like this. People start with fixed deposits and that journey keeps on adding different asset classes like PPF, mutual funds, stocks, NCDs and so on in their portfolios.

[00:08:35] So, that's what we are going to talk about from the less risk asset category to risky asset category. Lastly, if your household income is less than 20,000 rupees and if you are staying in a city like Mumbai where cost of living are through the roofs, then probably this might not be a helpful video. Because there are many areas where you want to spend and you also understand that you need to save money.

[00:09:01] But this is a really tricky place because there are restricted avenues and that makes you more risk averse in general. So, it is probably better not to invest in risky assets like stock markets. But I believe if you had planned your savings well then some components discussed in this video will really help you. But I will be making a separate video on how to invest if you are earning less than 25,000 rupees a month.

[00:09:31] So, in the due course of time do check this channel again to find out such kind of videos. But for now we are going to discuss the surplus funds. In the first case, we are talking about surplus funds of some percent of your monthly savings or monthly income. I sense this amount will never exceed your monthly income. Earlier I have given you an example that in a particular month if your income was slightly higher or your expenses slightly lower.

[00:09:59] Obviously we are not talking about 1% of the income. We are talking about some 10% to 50% of your monthly income. So, if you have earned 50,000 rupees a month and save around 20,000 on average then consider any cash flow of 10,000 to 25,000 as surplus fund under this category.

[00:10:21] Similarly, if you earn 2 lakh rupees a month treat anything below 1 lakh rupees as surplus funds under this category. In short, we should treat it like a half month salary that you have got for yourself. I suggest that there should be no significant changes to the entire portfolio allocation or investment side.

[00:10:42] You can probably make it a habit of investing anything that's above your monthly expenses so that the extra part of the salary will not be treated differently. This is because there are going to be months where you will spend more than 60% or sometimes more than your salary. At that time, you will use such kind of buffers. So, in short, do what you have been doing. Again, I won't tell you for this category to change any portfolio allocations.

[00:11:10] But if you want to experiment, do it in risk-free areas. For example, park those funds in EPF, FDs or NPS. If you are not into stock markets, don't jump into markets using this money. Category 2 funds will give you better opportunities to experiment with your money. And if you are a stock market guy, you continue what you are doing in this category. What if markets are not worth investing? That is another bigger question while you are investing, right?

[00:11:41] The main essence will be that you should not forget your business. In such cases, anyway, you will alter your regular investment plans and strategies, right? So, it's not just about your surplus funds. It will be about your regular investment too. So, not changing portfolio allocations, not experimenting with risky asset classes, and following the basic fundamentals of investing are important under this category.

[00:12:07] They are important in all categories, but especially in this category, because the amounts are small. On balance, I would say that in this category, you have to look it from a funds flow or liquidity management or expense management point of view, less from investing or portfolio management perspective. Or if you had planned a basic hotel, say in the next holiday, you can probably try to upgrade your rooms from this money.

[00:12:36] That's what I would say for this category. Now, moving on to the next category. Here, the amounts are higher. So, the minimum amount we are talking about is over and above the 50% of your monthly income. But it should not exceed half of your annual income. Basically, if your monthly income is say 50,000 rupees, then surplus under this category is any amount between 25,000 and 3 lakh. Yes, it's a bigger range.

[00:13:03] What is the scenario where you will probably, you know, get such kind of funds? Mostly your investments get mature or you redeem your investments in some way or the other form. And you get such kind of bigger chunk of money at one point. Second is that you are probably getting a bonus. So that's another scenario. You don't get such amounts every now and then.

[00:13:27] However, you can plan your investments in such a way that you get such cash flows every two years. That's basically aligning maturity dates of your fixed deposits or RDS and planning redemptions of your mutual funds in a phased manner. This gives you opportunity to experiment. Again, our motive is to go away from less risky assets to higher risk assets or basically low return asset to higher return assets. And obviously to diversify your portfolio.

[00:13:56] Assuming you have never invested in stock markets and you have been a fan of fixed deposits, PPAF, NCDs and so on and so forth. Then let's say you got one lakh rupees from some fixed deposit maturity. Now, if you don't want to experiment, it's your call. Completely fine with it. But if you want to explore equity markets, then your first stage should be adding a mutual fund, which the safer is the index mutual fund.

[00:14:25] Don't get into sector specific funds as of now. The basic thumb rule should be that 1 to 2% of your portfolio amount can go into experimentation. If your portfolio value is say 5 lakh rupees at that point, then don't experiment beyond 10,000 rupees. There are two ways to invest in mutual fund. First is lump sum and second is SIP. If market is at some lower levels, lump sum can be useful. But it's better to start with an SIP.

[00:14:55] In such a case, what I believe is that you divide your fixed deposit maturity 50,000 in renewing the same fixed deposit and 50,000 for that SIP. But for that 50,000, you open a flexi deposit where you get returns of fixed deposit and you get the flexibility of savings account. Right. You might know that.

[00:15:19] So when you are investing 50,000 in flexi deposit, what you can do is you can initiate an SIP. So for every month, there will be an installment, but you keep getting fixed deposit returns on that money on the balance money, whatever you have. So 50,000 is fixed deposit, proper fixed deposit and 50,000 is flexi deposit. And every month SIP is going from that flexi deposit over the year. So that's the first time you have to invest in a mutual fund.

[00:15:50] So that's the first time you have to invest in a mutual fund. So that's the first time you have to invest in a mutual fund. So that might change your decision about investing in equities. If that happens, you can increase your SIP amounts or whenever the next maturity of a fixed deposit happens, you can probably invest bigger chunk into equities. This was for people who have not invested in stock markets until now. But what if you have already invested in stock markets?

[00:16:18] If you have invested in mutual funds, try stock market, start with large cap stocks and then slowly, slowly add small caps also. If invested in mutual funds as well as stocks, then start thinking about sector mutual funds. Try experimenting with sectors if things are good with that. Then comes gold and silver too. As in, obviously, gold and silver is something which becomes a basic instinct for most investors. Like people start with fixed deposits and gold.

[00:16:45] But if you have not invested in gold or silver, there are ETFs and mutual funds that give you that opportunity. There are some schemes from prestigious trailers also where they invest in digital gold. Some are probably good also. So you might try that. There is another type of mutual fund which is called multi-asset mutual fund where that mutual fund invests in stock markets, mutual funds, gold and other asset classes also. So you can invest in that.

[00:17:12] I have prepared a beautiful video about which are the best multi-asset mutual funds in India. Do check that out. Then if you are exhausted with so many options, you can try international investments. There are some Indian mutual funds that invest in stock markets abroad. If not that you can start investing in stock markets directly of international companies. There are many platforms which allow you to do that.

[00:17:38] Here I have a suggestion that do not invest in global stocks for amounts lesser than 2 lakh, 3 lakh rupees. The amount should be a bigger chunk because there are so many restrictions. There are so many rules and charges. So it makes sense if the amount is higher. Then there are AIFs that is alternate investment funds which are not regulated as such. But if you want to diversify you can do it.

[00:18:05] But frankly I believe that they will not give you some massive returns which are more than stock markets. So I believe sticking to stock markets is probably the better strategy. Then see if you are missing on something. Let's say PPF or NPS. They are beautiful instruments and a lot of times people ignore them. And even if you are into a new regime for taxation. I think 1 lakh 50,000 every year in PPF is a good decision to do. Because the taxes are exempt.

[00:18:32] And it is also better to build retirement corpus at this phase. And PPF is a good instrument or NPS is also a good instrument for that. NPS is a little underappreciated. But I believe it's a very good instrument. Now I don't know with the UPS kind of scheme what happens. But NPS in general it's a really good scheme. Lastly there are a couple of types of mutual funds that should be on your watch list.

[00:19:01] One is contra fund and second is arbitrage funds. Contra is basically investing in the contrarian idea. SBI contra fund is one of the super hit mutual fund. Check that out. And there are arbitrage funds where you get returns like debt. But for a taxation purpose and every other purpose it's an equity mutual fund. And the taxes are lower, the returns are lower and the risk is also lower. Remember that this is a place where you can experiment. But think of extreme scenarios also.

[00:19:31] Are you okay if the money is wiped out? Therefore I believe experimentation should be restricted up to 1-2% of your portfolio. Not beyond that. Once you are confident in a particular instrument, a particular asset class. Then obviously you can increase the allocation and improve on your knowledge and market trends and so on and so forth. Another important aspect in this particular category is that it will help you in goal seeking.

[00:19:59] Okay, if you want to save for down payment of you know home loan. You can do that with these kinds of funds. You can park your money in some asset class and then take them out once you are deciding you know that you are taking a loan or something. That is important or your children's education abroad. That is important. So similar to the flexi deposit strategy for investing in SIP that I talked about earlier, you can create similar strategies using different asset classes.

[00:20:30] See to it that your maturities are aligned with some your goal. Let's say you want to spend or you are taking home loan next February. Then see if how can I align all the maturities and all the redemptions at a particular time around say January. If that is happening, then you can probably manage your funds properly. Another important aspect is that you can start keeping funds year month, especially for your retirement.

[00:20:59] You can start building corpus as I have already told you. And if you try to align in such maturities every two to three years, you can get lump sum amounts every two to three years. And you can invest that cash flow to your building your retirement funds. Now, let's move on. In the case of third category, we are going to talk about very, very, very, very, very huge amounts. It's like you are selling your house and you get 50 lakh rupees or one crore rupees at one time.

[00:21:29] So that's the amount we are talking about now. Then what you should do? See, the first thing is that you have to sort your taxation part. So if you are buying a property for a taxation purpose, then do that. If you are buying bonds, which are 54 EC bonds as they are called, do invest in that. So see to it that everything gets sorted and your tax liability is as low as possible.

[00:21:55] So once that is done, then probably you don't have to worry a lot about it. But still there is some part to be worried about because what to do with such a huge amount? There are two things at this point that matter. One is age and second is risk appetite. If you are old and have low risk appetite, better not to invest in risky assets and stick to the older traditional ones of keeping into fixed income groups.

[00:22:22] But if you are a very much expert in stock markets, then obviously nobody is going to stop you. And probably you are not listening or watching to this video also because you are an expert in it. Whenever you are going to invest that much money, are you going to invest 40-50 lakh rupees at one go? No, right? Take your time. I would say six months is a decent time to prepare a strategy.

[00:22:47] And for that period, I believe FDs or some liquid funds or some debt funds are the best place to keep or park those money. Now, how to think about dividing this money or portfolio allocation of that? For many people, this much amount can be equivalent to their own portfolio size. Right? So it's like managing another person's portfolio altogether. And why not think in that way only?

[00:23:15] If that's the case, you have to follow your basic investment strategy. For example, if your regular portfolio is 70% share of debt or fixed income assets, then so be it. Consider that surplus fund as your another duplicate portfolio and follow the same strategy. So I would say then in this category, probably don't experiment. Right? Because you want to save that money. You don't want to lose any of it.

[00:23:44] So probably it's the best strategy to consider what you are doing currently. If you feel you are happy with it, do the same thing with that money. Consider them as two different portfolios. It's a good strategy to think about. A lot of worry is reduced if you invest in fixed deposits or fixed income securities. It's only about the equities when you start to think or worry or all those things. I have a simple fund now.

[00:24:11] If you want to invest such an amount in equities, follow the strategy as suggested in the previous category. Make sure you take out money from your flexi fixed deposits or liquid funds and invest that money on a regular basis. It could be SIP or even buying stocks. You can take out say 10,000 every month and think of investing that much amount in SIPs or buying actual stocks. Or you can follow buy on dip strategy.

[00:24:40] But for everything, what you need is you park in some kind of liquid funds, some kind of flexi deposits so that you can take some money out every month. Now let's talk about fixed income securities, especially FDs in India. It doesn't matter if you are investing 10% or 100% in fixed deposits. You should not invest everything at one go and that too everything in one bank. Diversify them. Think about it like this.

[00:25:08] Create 50 FDs of 1 lakh rupees each. Who is stopping you? Okay. There are many banks, whatever your favorite banks are. Choose like top 2-3 banks which you like. So the best strategy could be that every month two FDs are maturing. It's a beautiful strategy because the cash inflow is also sorted, the liquidity is sorted and investment is also sorted. That can basically give you comfort that okay, every month one FD is maturing. It's like psychologically also, it's good feeling right?

[00:25:38] Okay. I have so much money that every month there is one FD of 1 lakh rupees maturing. You can invest that money. You can renew that fixed deposit. No problem with that. Then once that FDs matured, you have two FDs. Basically in that one month you are having 2 lakh rupees FDs maturing. You can basically renew that 1 lakh rupees FD and you can experiment with that 1 lakh rupees the other FD.

[00:26:02] You can probably invest some part of it in stock markets which is basically the same thing that I had discussed in the category 2 surplus funds. You can incorporate that strategy in this also. Provided experimentation is restricted to 2%. Okay. That's the crux. So summary of everything is this. First, diversify. Second, be open to experimentation.

[00:26:27] But every time you experiment, don't invest more than 2% of the portfolio value. Third, thinking about maturities and redemptions more meticulously so that you can achieve one particular goal in life. Fourth, build retirement corpus. Fifth, don't stop spending. Spendings are good. You have to enjoy your life but planning is important and splurging should be avoided.

[00:26:53] Sixth, prioritize expenses that are in the form of healthy lifestyle or better quality of experiences rather than living a stingy life. Seventh, don't invest in something just because someone else is investing. Don't invest in it if you are not comfortable. It's important that you are investing. Second, point about the FDs is that you have to think about how are you going to beat the inflation.

[00:27:18] So that is one thought which I would like to tell you that okay, probably in FDs you are not beating the inflation. So that's where the experimentation and diversification part comes in. But do not take a load of it. Eighth, don't make decision in haste or even on the basis of fashion. If things are not adhering to your investment philosophy, do not do it.

[00:27:44] See the crux of everything is that you need to feel secure after investing. Rather than being afraid of what's going to happen with my money, this and that. You should be happy that okay, you are investing in something. That's why it's important that if you agree, if your logic or your conscience is aligned to what you are investing in it. And if you are happy with it, be proud about it. Do not worry about it. The surplus funds should make you happier.

[00:28:11] So that's the last thing which I would like to tell. And please let me know if you have missed certain things because see this was my idea of how to think about surplus funds. You might have different idea. Do support this channel. If you have learned something new today, then like it. If you think that this information will be useful for someone else, then do share this video with others. And yes, don't forget to subscribe to the channel. Thank you.