If you have a shortfall in your investment account with just five years left for your financial goal, there is a strong chance that you may fail to achieve the goal.

But what if you have far more money than you actually need, when you are just nearing the investment horizon? Here is how you should manage your investment surplus.

Investment surplus Suppose you need ₹2 crore in your investment account to meet your child’s college education 12 years hence.

At the minimum, you estimate that you need ₹1.5 crore at the end of the time horizon. Assume that the five-year taxable cumulative bank deposit rate is 7.5 per cent (5.25 per cent post-tax, based on 30 per cent tax rate).

There are two aspects to creating the investment account — a floor portfolio and a full-value portfolio. Consider the floor portfolio first, where you are looking to accumulate the minimum wealth required for your goal.

In our example, at the minimum, you require ₹1.50 crore 12 years hence.

At the end of seven years (five years before your horizon is up), if you have ₹1.16 crore, invest the amount in a five-year taxable cumulative fixed deposit and get to ₹1.50 crore at the end of the 12th year.

So, the surplus here is the amount in excess of ₹1.16 crore at the end of the seventh year. Now let’s suppose you instead have ₹1.30 crore in your investment account after seven years.

This portfolio should be invested in fixed deposits, as you may not want to take on any risk by investing in equity. You are, after all, keen to just get to the minimum value needed.

So, given that the cost of that goal may exceed the minimum value of ₹1.5 crore, what can you do?

Ensure, first, that the residual maturity of the deposits you are investing in is only five years.

Then, you can invest the surplus of ₹13.86 lakh (₹1.30 crore less ₹1.16 crore) in equity, so that you are well placed to reach your ‘full-value’ target of ₹2 crore.

Suppose, you are left with ₹1.75 crore at the end of seven years.

In this case, invest ₹1.55 crore in taxable five-year bank deposits, which will reach ₹2 crore at maturity.

You no longer require the surplus of ₹20.15 lakh (₹1.75 crore less ₹1.55 crore) to meet your child’s education.

So, transfer this surplus amount to the next important life goal you are pursuing. The above approach is important because you should not risk more than the required capital to achieve any of your goals.

Balancing act If you are pursuing a high-priority goal, do not invest in equities in the portfolio earmarked to meet this goal during the last five years of the time horizon.

If you do, large losses in equity value can leave you short at the nth hour.

If the life goal is not a high priority, you may choose to have some equity investments even during the last five years of the time horizon for that goal.

The writer is the founder of Navera Consulting. Feedback may be sent to portfolioideas @thehindu.co.in

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