build a portfolio with adequate debt-equity allocation

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tfolio with adequate debt-equity allocation

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etty, 32, who lives in Mumbai, earns Rs 14 lakh a year, while his wife¶s annual income amounts to Rs 7 lakh. Th

d have availed of home loans for the same. The total EMI outgo stands at Rs 40,000. Other expenses amouns are primarily in insurance policies, which entail a total annual premium of Rs 82,000. Mr Shetty¶s goals incl

within five years and saving for the education of his

MENDATION

crease in options for the type of education systems available today, the cost of children¶s education is escalating, esn for higher costs right from early education years unlike only for higher education from the 18th year, which ha

We feel a general inflation rate of 6% may sometimes fall short, keeping in mind the spiralling education costsities, etc. The Shettys¶ goal of building a corpus of at least Rs 25,00,000 for their son in his 18th year, would co

a 6% inflation

creation of an emergency fund for any unseen events which may disturb cash inflows in the short term. In such ws for a period of say, six months, they need to set aside Rs 3,50,000. With the current savings bank balance being

ld be built up over a period of a year by putting aside Rs 22,500 per month in a higher yielding liquid debt fund. Tealth and life insurance plans to ensure risk coverage

illnesses, etc, besides causing disturbances in inflows may cause a huge dent in one¶s outflows due to medication

mmended to take a family health insurance policy which may cost the family approximately Rs 10,000 a year. Aloars for approximately Rs 1.5 crore is advisable. Mr Shetty could top up his existing money back policy up to Rs 1

policy for the sum assured, which should cost approximately R

ding for the recommended insurance premiums on policies, they will have a surplus of Rs 58,000 per month. Theeeping in mind an asset allocation which would help them realise their goals without an excessive strain on their r

PF investment to begin with (which gives best tax effective, risk-free returns at 8% currently) for the debt allocat combinations to create a suitable

allocation, considering their young age and no investments, we recommend the balance (Rs 38,000 p.m.) to be in

utual funds in a systematic investment format. Out of this, Rs 16,000 pm could be allocated towards the child¶s cors would yield a return of Rs 67 lakh after 15 years. He could look at transferring this corpus to debt investment



for his child¶s 18th

plan would need to be evaluated for all incremental salaries and at the time of repayment of home loan, money bany other material changes in cash inflows

askar-Apte, a certified financial planner, is a partner with financial planning firm, The Tipping Point



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Motors settles Singur payment issue with vendors | Tata Motors ask vendors to take back loan of 80-

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Motors in Jan | Tata Motors to pay principal interest on vendor's loan

Build a portfolio with adequate debt-equity allocation

23 Dec 2009, 0359 hrs IST, ET Bureau

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Praveen Shetty, 32, who lives in Mumbai, earns Rs 14 lakh a year, while his wifes annual income

amounts to Rs 7 lakh. They have purchased two

houses and have availed of home loans for the same. The total EMI outgo stands at Rs 40,000. Other

expenses amount to Rs 17,000 per month. Investments are primarily in insurance policies, which entail a

total annual premium of Rs 82,000. Mr Shettys goals include repaying the two home loans within five

years and saving for the education of his one-year-old son.

RECOMMENDATION



With the increase in options for the type of education systems available today, the cost of childrens

education is escalating, especially in metros. One may have to plan for higher costs right from early

education years unlike only for higher education from the 18th year, which has been an accepted

practice until now. We feel a general inflation rate of 6% may sometimes fall short, keeping in mind thespiralling education costs, extra curricular activities, creche facilities, etc. The Shettys goal of building a

corpus of at least Rs 25,00,000 for their son in his 18th year, would cost around Rs 67 lakh then,

considering a 6% inflation rate.

We suggest creation of an emergency fund for any unseen events which may disturb cash inflows in the

short term. In such a case, to provide for fixed cash outflows for a period of say, six months, they need

to set aside Rs 3,50,000. With the current savings bank balance being Rs 1,00,000, the remaining

amount could be built up over a period of a year by putting aside Rs 22,500 per month in a higher

yielding liquid debt fund. The Shettys also need to look at health and life insurance plans to ensure risk

coverage for dependents.

Accidents, illnesses, etc, besides causing disturbances in inflows may cause a huge dent in ones

outflows due to medication and hospital expenses. Its highly recommended to take a family health

insurance policy which may cost the family approximately Rs 10,000 a year. Along with this, a term cover

of up to 15 years for approximately Rs 1.5 crore is advisable. Mr Shetty could top up his existing money

back policy up to Rs 1.5 crore, or by taking a pure term policy for the sum assured, which should cost

approximately Rs 25,000 per year.

After providing for the recommended insurance premiums on policies, they will have a surplus of Rs

58,000 per month. The Shettys need to build up a portfolio, keeping in mind an asset allocation which

would help them realise their goals without an excessive strain on their risk tolerance. It is advisable to

start a PPF investment to begin with (which gives best tax effective, risk-free returns at 8% currently) for

the debt allocation. One could also look at floater-MIP combinations to create a suitable debt portfolio.

For equity allocation, considering their young age and no investments, we recommend the balance (Rs

38,000 p.m.) to be invested in growth and value-oriented mutual funds in a systematic investment

format. Out of this, Rs 16,000 pm could be allocated towards the childs corpus for the next 15 years. At

10% pa, this would yield a return of Rs 67 lakh after 15 years. He could look at transferring this corpus to

debt investments for the next two years, till required for his childs 18th year.



Note: The plan would need to be evaluated for all incremental salaries and at the time of repayment of

home loan, money back from insurance policies and any other material changes in cash inflows and

outflows.

Prerana Salaskar-Apte, a certified financial planner, is a partner with financial planning firm, The Tipping

Point

build a portfolio with adequate debt-equity allocation

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