Mutual Funds

Invest in debt for short-term goals

K. VENKATASUBRAMANIAN | Updated on August 03, 2013 Published on August 03, 2013

With more leeway on time, one can invest in mutual funds and other avenues.

I am 42 and have two children aged 16 and 8. I haven’t made any investments yet but I want to start a plan for my children’s education and my retirement. Here’s what a friend has advised — term health cover for about Rs 2 crore, a term accident cover for up to Rs 2 crore, MF SIP every month. Given that I haven’t made any investments, I would like a slightly aggressive plan to build a corpus. My needs are: Rs 10 lakh in a year for my son’s college education, Rs 20 lakh in four years for further studies, Rs 15 lakh for my daughter’s college education in eight years, Rs 25 lakh for my daughter’s higher education in 10 years.

Alok Saraogi As the idiom goes, ‘it is better late than never’ to start investing for your goals. Coming to the first part of your question, either your friend has misunderstood insurance terminologies or there may have been a gap in communication.

There is no ‘term health’ cover. Term covers give your dependents a sum assured in the event of any adverse happenings. Health policies provide coverage when you are hospitalised. Accident covers do exist, but these are mostly available as riders to existing term covers for a small additional premium.

Health cover need not be taken for Rs 2 crore as suggested by your friend. You can take a floater policy for Rs 10-15 lakh. Accident rider is optional.

As far as your goals are concerned, you haven’t mentioned your current salary and surplus. We assume that you have the surplus for regular investments over the next ten years.

Moving to your targets, the first two are constrained by shorter timelines. Hence, safety should be your priority while investing for these targets. For your son’s education in one year, you should opt only for fixed deposits as they are safe and secure.

For his higher education in four years, you can opt for a mix of bank deposits and balanced funds. If you can generate post-tax returns of seven per cent annually on these, the amount that you need to invest from now on would be Rs 45,000 every month. Consider HDFC Balanced, ICICI Pru Balanced and Birla Sun Life Dynamic Bond Fund for the same.

The goals pertaining to your daughter give you a lot more leeway in terms of investing in mutual funds. You can invest in large-cap and balanced schemes for achieving the targets.

For her education, you need to save Rs 11,500 every month and even if you get moderate returns of eight per cent, you will be able to reach the target. Invest in Quantum Long Term Equity, UTI Opportunities, Reliance Equity Opportunities and Birla Sun Life 95 in equal proportion for the same.

For her post-graduation, you will need to save Rs 12,500 every month, assuming returns to be 10 per cent. Split Rs 3,500 each in Franklin India Bluechip, ICICI Pru Focused Bluechip Equity and Birla Sun Life Frontline Equity. Park Rs 2,500 in IDFC Premier Equity.

Given that you have made no other investment, it is very important for you to monitor your portfolios for all goals very closely to weed out underperformers and also to rebalance. In case of any abnormal rallies or if you reach the target sum ahead of time, book profits or exit completely and move the proceeds to safer debt avenues.

In the long term, please note that you can build a balanced portfolio only if you invest across different asset classes, such as debt (FDs, RDs, PPF and NSC), gold and real-estate.

For your retirement you can consider investing in the national pension system (NPS). It is a low-cost investment and you can choose allocation across equity, government debt and corporate bonds, according to your risk appetite.

*** I am 43 and have been investing Rs 10,000 through the SIP route in the following schemes for the past six months: Franklin India Bluechip – Rs 2,000; Franklin India Prima Plus-Growth – Rs 2,000; L&T Equity – Rs 1,000; IDFC Premier Equity – Rs 2,000; Quantum Long Term Equity – Rs 3,000. My long-term target is to accumulate Rs 1 crore for my retirement in about 16 year’s time. Am I investing in the right funds or is any modification required?

Ramamurthy Although you have started a bit late in investing for your retirement, there is still sufficient time for you to build a reasonable corpus.

You should note, however, that accumulating Rs 1 crore in 16 years by investing Rs 10,000 every month would be quite challenging as that would require your portfolio to generate 17-18 per cent annually. A more reasonable 12 per cent return expectation would require you to invest Rs 17,500 every month. But don’t be disheartened by this projection if you don’t have the surplus. Our suggestion would be to gradually increase deployment in funds as your surplus increases over the years.

Coming to your portfolio, you can trim down your investments to four funds.

Invest Rs 3,000 each in Franklin India Bluechip and Quantum Long Term Equity. Exit L&T Equity, a moderate performer. Franklin India Prima Plus too, can be exited, as you already have a fund from the same asset management company. Of course, the fund has been quite consistent, but may not suit your portfolio as a more large-cap focused fund (with some mid-cap stocks thrown in) may better serve your purpose than a multi-cap fund. So, invest Rs 2,000 in Birla Sun Life Frontline Equity instead. Continue your investments in IDFC Premier Equity.

Review your portfolio periodically and take corrective action, if necessary. Also, try to invest in other avenues, such as debt, gold and real estate, to create a balanced portfolio.

Published on August 03, 2013
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