Mutual Funds

Fund Talk

AARATI KRISHNAN | Updated on August 27, 2011

Invest any lumpsum towards children's education in a liquid fund and use a systematic plan to move money into a balanced fund.

I am 43 years old and employed in a public sector company. I have two children, aged 11 and 6. I have no pension facility after my retirement. After reading your Fund Talk for the last few weeks, I have started systematic investment plans in the following schemes just three months ago. The details: Rs 5,000 per month in ICICI Focussed Bluechip Fund, Rs 4,000 in IDFC Premier Equity and Rs 2,000 in IDFC Small and Midcap Fund. I would like to save for a trouble-free life after retirement and save towards a sum for my children's education. I will receive Rs 10 lakh from disposing of a plot of land. Please enlighten me how to invest this amount in mutual funds in a disciplined manner to ensure my children's education and comfortable retirement.


Andhra Pradesh

An early start makes all the difference when it comes to planning for retirement or other long term goals. Therefore, it is good that you have made a beginning now. However, from the details you have provided, you seem to be allocating about 50 per cent of your monthly salary to systematic investments in equity funds.

Do note that before you save towards retirement and children's education, you will need to put aside savings towards a simple term insurance plan to cover your life, savings towards any medical expenses and debt investments to meet any contingencies over the next 2-3 years. If you don't have these, you will need to set aside part of your savings towards these before you embark on SIP investments.

Allocate only that money to equity funds that won't be needed over a five year period. Also, remember that equity investments can suffer capital erosion in line with market movements over the short term. Assuming you are prepared for this, here is how you can plan towards retirement and your children's education.

Retirement needs

As your retirement comes up much after your children's education, you can use your SIPs towards your retirement corpus and the Rs.10 lakh you received from sale of assets towards your children's education.

If your monthly living expenses are Rs.10,000 now, that may amount to about Rs.40,000 per month 17 years later at a 8 per cent inflation rate. We are assuming here that you retire at 60 and have a life expectancy of 90. To be able to get a monthly income of Rs.40,000 post retirement from your mutual fund investments, you will need to save Rs.10,000 per month, and raise this savings by 10 per cent every year.

Your investment should earn a 15 per cent return to be able to meet your retirement needs. This will require you to invest in equity oriented funds.

However given your situation, we would recommend that you take exposures in equity funds with lower risk or in balanced funds. Small and mid-cap funds do tend to suffer very big swings in value and we would not recommend them to you.

You can invest in them once your income levels or savings rise substantially. SIPs in funds such as HDFC Top 200, FT India Dynamic PE Ratio Fund and DSP BR Balanced Fund may allow you to earn a 15 per cent return without taking too much risk. We request you to review your funds twice a year and replace them, if they significantly underperform their benchmark. Any unusual gains of say 30-40 per cent in a single year can be redeemed and reinvested.

You can invest the Rs.10 lakh you received from asset sales for your children's education. Again, balanced funds may be a good choice.

Investing Rs.6 lakh at a 12 per cent annual return over the next seven years would leave you with Rs.13.3 lakh when your first child is 18. The remaining Rs.4 lakh invested for 12 years will give you Rs.15.6 lakh when your second child turns 18.

We recommend that you do not invest the entire lump sum at one go. Invest the Rs.10 lakh in a liquid mutual fund/short-term debt fund and use a systematic transfer plan to move that money into a balanced fund at monthly intervals. You can use DSP BR Balanced Fund, HDFC Prudence, HDFC Balanced for your requirements.

Queries may be e-mailed to >, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Published on August 27, 2011

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