Fund Talk

I am a self-employed professional aged 44. I have a daughter in class eight and a son in class three. I plan to retire at 60 and have been investing Rs 40,000 a month through SIPs over the last two years in various equity mutual funds. I also invest in PPF. These are purely for my post-retirement life. My investments in real estate, including the flat in which I stay, are worth Rs 2.25 crore today. I am hoping it will cover expenses arising from any major health issues or any mishaps on the professional front.

Now I would like to invest another Rs 20,000 a month purely for my children's education so that I can raise at least Rs 10 lakh (please include inflation). I want it to be in debt instruments with no exposure or at best minimal exposure to equities.

I was planning to invest Rs 10,000 a month in recurring deposits, Rs 5,000 in gold ETFs and another Rs 5,000 in HDFC Children's Gift fund-Investment plan. I read in Business Line that dynamic bond fund and income funds are worth considering for the short term. I would like to know more about them. Please suggest me a plan.

Ajith C

It is good that you are using a combination of the time-tested public provident fund and equity mutual funds for your retirement. If your equity funds deliver at least 14 per cent per annum then your Rs 40,000 a month savings can help build about Rs 3.8 crore when you turn 60. But move the profits from your portfolio to safer debt instruments a few years before your retirement.

Do not depend on your real estate portfolio for your medical needs. Ensure that you have a medical policy, for you and your family. You can consider a reverse mortgage on your apartment for any shortfall in your retirement portfolio.

Children's portfolio

Moving to the portfolio that you are building for your children, we assume that you want to build Rs 5 lakh a child in today's value. To be on the safer side, let us assume an 8 per cent per annum of inflation. That will mean, in four years, when your daughter finishes high school, a Rs 5-lakh course will cost Rs 6.8 lakh. Similarly, you will need Rs 9.9 lakh for your son's higher education after nine years.

Building an education portfolio in four years, that too with debt instruments, is normally a challenging task. However, this should be possible with a reasonably large SIP of Rs 20,000 together with small exposure to equity.

Income funds

Dynamic bond and income funds are all good debt products in a long-term portfolio. These funds typically shuffle their investments in debt instruments based on the interest rate cycle. For instance, they invest in long-term instruments if they anticipate interest rates to decline and try to gain from the rising prices in bonds. Or they may go for short-term instruments if interest rates are moving upward.

You are, therefore, spared the hassle of tracking interest rates and timing your investment in debt.

Schemes such as monthly income plans also seek (not mandatory though) to declare regular dividends.

But given that your daughter's education expense is only four years away, pure debt funds may or may not deliver over 9 per cent returns in this period. Hence, go for funds such as HDFC Children's Gift Savings Plan, which will have a small proportion invested in equities. Invest Rs 8,000 a month in this fund and Rs 4,000 a month in Canara Robeco MIP.

We will not recommend over 10 per cent of your savings or Rs 2,000 a month in gold ETFs. The recent outperformance of gold is more a result of current economic uncertainties. But such a situation may well change. We believe holding quality equity funds can still generate superior returns over the long term.

On your plan to invest in recurring deposits (RD), do keep in mind that RDs are not very tax efficient and you will have to pay tax on interest at your normal tax rate. Debt funds, on the other hand, will attract relatively less tax on the capital gains.

Of the remaining Rs 6,000, go for a four-year bank recurring deposit for Rs 3,000 a month and invest another Rs 3,000 a month in the systematic savings plan of HDFC deposit for a four-year period. This also runs like a recurring deposit (RD). Deposits in NBFCs may yield slightly higher returns. Interest rates may begin to slide this year, in which case your RD rates will also start falling.

Use the RD sums and sell required units in the mutual funds to meet your daughter's education expenses. Once the RD is closed, increase SIPs in HDFC Children's Gift and Canara Robeco MIP for your son's education. At least two years before your son starts college, move this to bank fixed deposits or liquid funds. Please note that we expect a return of at least 8.5 per cent annually from your portfolio. While your RD may fetch lower, we hope the mutual funds will still make up in the long term.

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