Saturday, 1 December 2012

Build different portfolios for different financial Goal

                  Anubhav (name changed) started building a kitty for his daughter's education and marriage almost as soon as she was born but now finds himself falling short, Anubhav did the right thing in starting early. But like the orerwhelming Indian majority, he invested in low-yielding instruments. Starting a bank deposit in your child's name or buying a child insurance plan my simply not be enough to secure your child's future. The income grows alright, but so do the cost of education and wedding expenses.
                  Here's a do-it-yourself portfolio plan that you may consider putting in place for your child:
Assess the cost: First assess the future cost of education and marriage expenses. Today education expense is 7% higher compared with a year ago, according to data from the Consumer Price index (CPI). If this were to continue, the cost of a graduate programme of say Rs. % lakh today will more that 10.5 lakh in 11 years. Hence, keep the future value in mind. For wedding, take in to account a 8-9% price riser per year.
Time horizon: Secondly, find out when you need to rach your goals. That will decide the nature of your child's higher education is say 10 years away, you can hold a good proportion in equities - an asset class known to beat inflation over the long term. But if you need the money in say 2-3 years, then you will have to settle for fixed deposits or short-term debt funds,

Both equities as well as options 
such as PPF and NSC are far 
more tax efficient than the 
regular fixed deposits offered 
by banks:

Start early: Starting early allows you to take exposure to high-yielding asset classes besides using the power of compounding in your favour. Option such as systematic investment plan (SIPs) offered by mutual funds allow you to make small investment for the long term in a disciplined way. But you should increase this investment at least once a year, as your income grows.

Separate portfolios: Ensure you have separate investments for different goals. This is important because an investment you choose for a goal that is 10 years away may not be suitable for another goal that is just three years away.
Building a portfolio: Should you have deposits, PPF, mutual funds, child plans or gold? Ideally you should have a combination of these. But if you can take some risk and your child's requirement is a while away, then high yielding asset classes like equity should account at least 50% of your portfolio. Gold can find a place in a marriage portfolio with 5-15% allocation. The rest can be in a combination of debt products such a PPF, deposits, long-term tax-saving bonds and NSC.
Remember, both equities as well as options such as PPF and NSC are far more tax efficient than the regular fixed deposits offered by banks. Also, if you do not understand the child insurance plans offered in the market, then stay away. A portfolio built simply with a combination of regular equity funds and debt should fit   your need as well.
               However, do go for a simple term insurance in your name, to cover the cost of all these goals in case of any eventuality. The premiums are not high and it is the best risk cover you can think of to sucure your child's future.

Source: Times of India, Ranchi (Tuesday, Nov. 27, 2012
             The author is head, mutual fund research, FundsIndia