Building a moderate-risk portfolio

A woman, ‘X’, aged 35, with her five-year-old daughter ‘Y’, came for a discussion last month to plan her finances.

She is a legal divorcee and her daughter was born in the US.

X is not in a position to move to the US at this point of time. Being a single mother, she has unique challenges in taking care of her little daughter.

It has been agreed by way of understanding that the father will take care of Y’s school education till she completes her 12th standard.

To better that, he has made an investment in Y’s name to fund her college education. Y will receive ₹50 lakh at 18 years of her age. This could be used only for her education, as per the agreement.

As the child is a US citizen, the cost of education is higher in India as per the prevailing norms. Many of you would be aware that for foreign nationals and NRIs, college fees are higher in India.

A course in engineering can cost $7,000-11,000 per year, excluding hostel and other fees. Moreover, this will have to be paid in USD.

A Chennai flat that X owns is likely to be sold as she is not comfortable in maintaining different properties at different locations.

Hence, we drafted a goals list for X as below.

Emergency fund of ₹8 lakh and a running cash balance of ₹2 lakh in her savings account at any point of time

Car purchase - ₹8 lakh in 2019

Y’s higher education cost - $15,000 per year for a four-year course (will be partly funded by the ₹50 lakh to be received from her father when she turns 18)

X’s retirement at the age of 60 with the current living cost of ₹50,000 per month

X’s mother’s medical expenses - ₹5 lakh to be kept as reserve

X’s career growth fund - ₹1.75 lakh for a specific course in 2020

When a risk assessment for X was carried out, it was not a surprise that she looked for safety of capital. But her returns expectation was not realistic.

Hence, we advised her to opt for a moderate risk in her investment portfolio, investing not more than 30 per cent of her savings in equity as part of overall asset allocation.

We advised her to consider the following after a detailed analysis of her financial goals.

X was asked not to opt for any life insurance as her daughter’s education will be taken care by her father.

As she had only a ₹2-lakh health cover through her employer, she was advised to opt for a ₹10-lakh health insurance covering herself and her daughter.

She also needs to reserve ₹2 lakh from this year’s savings towards any medical emergency for her mother. She needs to increase it by another ₹3 lakh next year and completely fund this goal through fixed deposit/liquid funds.

We suggested her to move ₹8 lakh cash in hand to a liquid fund towards an emergency fund. Once she sells her flat in Chennai, she can invest ₹15 lakh towards her daughter’s education for a time horizon of 13 years. She further needs to invest ₹1.92 lakh per annum towards Y’s education.

We advised her to use the proceeds from the sale of the flat to buy a car. As she looks to have more safety features in her car, her budget is ₹8 lakh.

The balance of the sale proceeds can be used to fund X’s education.

Salary bonus to be received from current year can be used to fund her retirement. Investing ₹3.5 lakh per year towards her retirement, at an expected return of 10 per cent CAGR for 25 years till retirement, would fetch her a corpus of ₹3.44 crore. In addition, she would get ₹1 crore from her PF accumulation at the time of retirement.

As she needs ₹8 crore to fund her current lifestyle expense of ₹50,000 per month at her retirement, we advised her to accelerate her investments when income increases. She also needs to put more money for retirement once her daughter’s education goal is fully funded.

We recommended X to increase her exposure to fixed-income savings to maintain the asset allocation based on her risk profile. She can invest a maximum of ₹1.5 lakh per year in the Public Provident Fund (PPF), which can also be used for tax-saving purposes.

She should not invest in Sukanya Samriddhi Scheme as it is not allowed for foreign nationals. She was advised to invest in large- and mid-cap equity mutual funds towards her daughter’s education and her retirement. To balance her fixed-income allocation, she was advised to invest in good-quality debt mutual funds.

The writer is an investment advisor registered with SEBI

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